Family Inc. by Douglas P. McCormick

Author:Douglas P. McCormick
Language: eng
Format: epub
ISBN: 9781119219743
Publisher: Wiley
Published: 2016-03-19T00:00:00+00:00

As Figure 13.1 suggests, both venture capital and buyouts exhibit large differences in performance among active managers, creating an opportunity for good managers to deliver value well in excess of their fees and expenses. While both these private equity asset classes can be attractive, late-stage buyouts represent the more compelling risk-adjusted profile. Venture capital has demonstrated attractive long-term returns, but these seem to be biased toward the excessive returns associated with unpredictable periods of innovation such as the Internet boom of the late 1990 s. Without these outlier returns, the performance has not been as compelling, and disruptive innovations of this magnitude are infrequent as well as unpredictable. Furthermore, VC firms’ returns are driven by a limited number of huge successes. It can be hard to determine if the fund manager delivered these returns through skill or luck. By contrast, exceptional buyout returns are generally driven by numerous successes and few failures, making attribution of returns easier. Lastly, buyouts have delivered better risk-adjusted returns than venture capital, as measured by the Sharpe ratio.1 These are all reasons that in my own professional life I’ve chosen to focus on buyouts.

The second area in which active management is appropriate is in asset classes showing low correlations with the broader securities markets. Examples are merger arbitrage, hedge funds, and turnaround strategies, which offer similar risk-reward attributes with low correlation to the overall portfolio. Adding these strategies can provide similar expected returns but with lower overall portfolio volatility.

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