2018 Alternative Investments Outlook

12.22.2017 - Wayne A. Sprague

A Renaissance in Private Equity Attracts Individual Investors

Private equity is going through a period of renewal as the global economic recovery continues. Investors are receiving distributions through realizations of long-term investments, and private equity sponsors are fundraising with vigor for future opportunities.

How it Works: Investing in a Partnership

Private equity funds take concentrated ownership stakes in companies across a variety of sectors and industries that are not publicly traded. They are created as limited partnerships, providing a management fee of 1.5% to 2% of committed capital and a performance fee that is typically 20% of realized profits. Outside investors are considered limited partners (LPs), and they receive income and capital gains generated by the fund’s investments.

Less Liquidity, Longer Investment Horizons

The lifespan of a private equity fund is finite and it includes two distinct phases: a four-year period in which the general partner is making investments, and another six to eight years when the investments are being realized (the acquired companies go public, are sold or recapitalize). This is when investors see a return on their investment.

Performance is usually negative in the early stages due to capital outlays for acquisitions, fees and administration. Returns should then climb upward in subsequent years. Funds are illiquid in nature; although a secondary market exists, the process is cumbersome and transactions are executed at a healthy discount to fair value.

Buyout and Venture Capital Strategies
There are two main types of private equity strategies:

  • Buyout strategies use borrowed funds and equity to buy a firm outright or purchase an ownership stake. The loan is repaid using the cash flow generated by sales, operations, and/or sales proceeds.
  • Venture capital strategies focus on startups and early-stage companies, often with innovative technologies or a patented process. Most investors are underweight in this category, which has the potential to offer compelling returns, albeit with incremental risk.
Finding the Best Private Equity Investments

Measuring the risks and returns of private equity investments is complicated and can vary significantly across different private equity firms. To learn more, please contact your Fiduciary Trust portfolio manager.


This analysis is provided for illustration and discussion purposes only and does not guarantee future results. Please speak to your Fiduciary Trust contact if you have questions or would like more information. This communication is intended solely to provide general information. The information and opinions stated are as of December 1, 2017, and may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA institute.


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