Returns on Private Equity vs. Other High Return Investments

The world of investing today provides many options on how you as an investor can put your money to work. But not all investments are created equal. Each has a unique approach, model and expected outcome. In addition, many of these have different levels of risk within each unique model, so you end up with a very large pool of investment choices.

So which one should you choose? It’s a good question and one only you can answer, but we’re providing you insight on one specific type of model against all of the others.

That investment model is Private equity.

Private equity has consistently been one of the most attractive investment options for investors of all types whether you’re an accredited investor, considered a high-net-worth individual, managing a family office or are an institutional investor because of the potential for very high returns..

Since this is also considered an alternative investment, not regulated by the SEC and for the most part illiquid you’ll find that private equity investments will perform counter to the market which makes it a great choice for investment diversification.

You may ask “How do private equity investments perform against other high yield investments?” which is also a great question. Private equity has produced average annual returns of 10.48% over a 20-year period and have outperformed the S&P 500 and venture capital since 2000. It’s no surprise that private equity investing remains one of the top investment types of executives and directors.  

What is a Good Rate of Return

We opened sharing that on average has been delivering around 10.50% which is great, but the question is “How great is that really?”. For some that is all they need and it really is dependent on your goals and expectations.

What are you investing for?

There are a number of core reasons people invest which typically fall under the categories of providing financial stability or freedom in the future or to purchase something in the future. Either way you are able to calculate against what you need in the future to determine what a good rate of return needs to be for you.

Many people are investing for their child's college tuition, saving for retirement, or accumulating cash to invest in larger, more lucrative investments in the future.

The most important consideration in determining a good ROI is your financial need. For example, suppose a young couple is investing to pay for college tuition for their newborn child. A good ROI for them will be one that enables their initial and ongoing investments to grow enough to pay for college expenses 18 years down the road.

So while 10% may be good to some, others will need to find ways of generating even more through different investment models. Check out our Velocity3X Fund that is positioned to increase your investment by 3 times in just four years.

Private Equity Performance Measures

How should an investor measure the performance of their private equity investments?

There are some very established norms around this that we can share with you here on measuring private equity returns. To keep things simple we’ll focus on the internal rate of return (or IRR), the multiple on invested capital and the public market equivalent.

Internal Rate of Return (IRR)

This can be defined as the discount rate which makes the net present value (NPV) of an investment zero. It’s the expected compound annual rate of return that will be earned on an investment.

Multiple on Invested Capital (MOIC)

This metric determines how much value an  investment will eventually generate. It is typically calculated both at the deal level and during portfolio analysis & reporting. Essentially it is a multiple of the original cost of investment and the extension of profits investors will receive upon exit.

Public Market Equivalent (PME)

The PME metric is a way to measure private equity performance by comparing it against a public market index. This is a more measurable, continuous benchmark compared to peer performance datasets. This is great for comparing two investment types in the same economy.

How do Buyouts in Private Equity Hold Up?

Over the past 10 years investors have committed over $2 Trillion into funds focused on private equity buyouts and there is a clear reason why. They generate phenomenal returns!

Buyouts in the U.S. alone have generated on average net returns of 13.1% across the past 30 years. If you compare that to the public markets they don’t even come close.

Unfortunately, this isn’t a secret and more investors are getting in on these opportunities. This obviously means higher demand, more competition and higher purchase prices in the future.

An important point for investors is that the longer you wait the less lucrative these deals will be for you based on that increase. You cannot afford to wait 2, 3 and 4 years just to get in.

While we would love to have you working with us as an investor on deals like these we know it takes an education on each fund and finding one that you are most comfortable with. So we invite you to reach out to us about the Velocity3X Fund which is positioned to generate a return of 3 times your investment at the end of a 4 year growth holding period. The sooner you start the sooner you see returns!