Introduction to Private Equity

General Conclusion - Private Equity Today and Tomorrow

The main challenge that private equity has to face in the short term is to offer better volatility management (see section 1) to its limited partners. Even though there is no indicator offering a direct reading of this increased risk management approach, assessing the general partners’ aptitude to think over the long term will be crucial (see section 2). Volatility management will probably not only ignite a flow of initiatives towards financial innovation (see section 6(b)), but also bring some changes in the presentation of results, notably through the use of fair market value (see section 3), which could have a considerable negative impact on private equity (see section 5). In that respect, private equity is at a crossroads: increased knowledge of the asset class can provide limited partners with more options (see section 6), but could also transform the asset class into an overly regulated sector - which is a lose-lose scenario.

1. CORE TARGET: MANAGE THE VOLATILITY OF PERFORMANCE

More than illiquidity, the volatility of private equity performance is difficult to manage (see Cartoons C.1 and C.2). Illiquidity is an intrinsic component of private equity investing. It is quantifiable in many respects: a fund is created for a given time, with a defined investment period, and a cash-flow profile which is well known. The experience of general partners and limited partners allows them to manage this illiquidity more or less ...