Private equity is currently replacing hedge funds as the most observed asset class. And while mutual funds experience a decline of assets under management, buyout funds break all records as far as fund raising is concerned. The attractiveness of buyout funds among investors is often attributed to superior returns and to an allegedly lower correlation with other asset classes. However, buyout fund returns also show superior volatility. In addition to that risk factor, investors must face liquidity and transparency risk. It is common agreement that investors are compensated for the elevated risk through a return premium. This and the cited lower correlation prompt more and more investors to add private equity into their portfolios. The wide-spread opinion of superior private equity performance is backed by several studies. But the analysis of these studies reveal that a number of them employ methodologies which are disapproved of by experts on theoretical private equity performance measurement. Furthermore, some have a one-sided notion of financial performance. Benchmarking, risk and correlation data which are crucial for an overall performance assessment often lack. The analysis of a series of technically appropriate, objective studies shows that private equity has historically outperformed public equity with regard to returns, in Europe more than in the United States (US). What remains unsolved is to which extent this return premium rewards the inherent, additional risk of private equity investments. And what is more certain: the prevalent view on correlation seems to be wrong. Empirical evidence and qualitative analysis speak for high correlation between private equity and the major asset classes. The most important driver for individual fund performance appears to be the quality of fund management. Thereby, specialized teams outperform others. Moreover, specialized funds provide investors better opportunity to diversify their private equity portfolio. Fundraising and investment conditions for private equity funds in France and Germany are favorable, but the accomplishment of superior performance will become harder in the future. The rules of the private equity business are changing as operating leverage has replaced financial leverage as the essential value driver.
Inhaltsverzeichnis (Table of Contents)
- Abstract
- 1. Introduction
- 1.1. Motivation
- 1.2. Objectives
- 2. Private Equity - An Overview
- 2.1. What is Private Equity?
- 2.2. What is a Leveraged Buyout?
- 2.3. Limited Partner
- 2.4. General Partner
- 2.5. Target Company
- 2.6. Financing of Leveraged Buyouts
- 2.6.1. Equity
- 2.6.2. Debt
- 2.6.3. Mezzanine
- 2.7. Exit Channels
- 2.8. The Three Levers for Value Creation in Leveraged Buyouts
- 2.8.1. Financial Leverage
- 2.8.2. Operating Leverage
- 2.8.3. Market Timing / Exit Multiple
- 3. Performance Measurement of Private Equity
- 3.1. General Financial Performance Measurement Theory
- 3.2. Performance of the Asset Class Private Equity
- 3.2.1. Performance Measurement Theory
- 3.2.2. Performance Measurement Practice
- 3.2.3. Recent Study Results
- 3.2.4. Implications
- 3.3. Performance of Individual Private Equity Funds
- 3.3.1. Performance Measurement Theory
- 3.3.2. Recent Study Results
- 3.3.3. Implications
- 4. Macroeconomic Environment for Private Equity in Germany and France
- 4.1. History of the Private Equity Markets
- 4.2. Legal and Fiscal Environment
- 4.3. Fund Raising
- 4.4. Debt Financing
- 4.5. Investment Opportunities
- 4.6. Competition within Private Equity
- 4.7. Business Markets and Perspectives
- 4.8. Exit Channels
- 4.9. Conclusion - Exploitability of the Three Value-Creating Levers
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This thesis aims to analyze the performance of private equity funds, examining both theoretical frameworks and empirical results. It investigates the factors driving returns and explores the implications for investors.
- Performance Measurement of Private Equity Funds
- Factors Driving Private Equity Returns
- Risk and Return in Private Equity
- Macroeconomic Influences on Private Equity
- Comparison of Private Equity Performance Across Regions
Zusammenfassung der Kapitel (Chapter Summaries)
1. Introduction: This chapter introduces the topic of private equity, highlighting its growing popularity compared to public equity in the wake of the 2001 dot-com bust. It emphasizes the attractiveness of private equity due to its perceived superior returns and lower correlation with other asset classes, despite the inherent risks like liquidity and transparency issues. The chapter sets the stage by posing key questions regarding the measurement of private equity performance, past performance insights, return drivers, and future prospects.
2. Private Equity - An Overview: This chapter provides a comprehensive overview of the private equity industry. It defines key terms such as leveraged buyouts, limited partners, general partners, and target companies, explaining the roles and interactions between these entities. It delves into the financing mechanisms of leveraged buyouts, including equity, debt, and mezzanine financing, and discusses various exit channels available to private equity investors. Finally, it introduces the three levers for value creation in leveraged buyouts: financial leverage, operating leverage, and market timing/exit multiple.
3. Performance Measurement of Private Equity: This chapter focuses on the methodologies used to measure the performance of private equity investments. It begins by reviewing general financial performance measurement theory, then transitions to the specific challenges and nuances of assessing private equity performance. The chapter contrasts theoretical performance measurement with actual practices, analyzing recent studies and their methodologies. It highlights inconsistencies and limitations in existing research and presents implications for a more comprehensive approach to evaluating private equity returns, considering both the performance of the asset class as a whole and individual funds.
4. Macroeconomic Environment for Private Equity in Germany and France: This chapter examines the macroeconomic factors affecting private equity markets in Germany and France. It traces the historical development of these markets, analyzes legal and fiscal environments, and explores fundraising, debt financing, investment opportunities, and competitive landscapes. The chapter also considers the impact of changing market conditions on the three value-creating levers introduced previously and examines the evolving exit strategies and their influence on investment decisions within these specific geographical contexts.
Schlüsselwörter (Keywords)
Private equity, leveraged buyout, performance measurement, risk, return, fund management, macroeconomic environment, Germany, France, financial leverage, operating leverage, exit multiple, liquidity, transparency.
Frequently Asked Questions: Private Equity Performance Analysis in Germany and France
What is the main topic of this document?
This document is a comprehensive preview of a thesis analyzing the performance of private equity funds, focusing on performance measurement methodologies, return drivers, and the macroeconomic influences in Germany and France. It provides an overview of private equity, including its mechanisms, and explores the challenges of performance evaluation in this asset class.
What topics are covered in the Introduction?
The introduction establishes the context of the research, highlighting the increasing popularity of private equity post-2001 dot-com bust and its perceived superior returns despite inherent risks. It sets the stage by posing key questions about performance measurement, past performance, return drivers, and future prospects within the private equity landscape.
What is explained in the "Private Equity - An Overview" chapter?
This chapter provides a detailed explanation of the private equity industry. Key terms like leveraged buyouts, limited partners, general partners, and target companies are defined, clarifying their roles and interactions. It also covers financing mechanisms (equity, debt, mezzanine), exit channels for investors, and the three key levers for value creation: financial leverage, operating leverage, and market timing/exit multiple.
What does the chapter on "Performance Measurement of Private Equity" cover?
This chapter delves into the methodologies for measuring private equity investment performance. It starts with general financial performance measurement theory and then addresses the specific challenges of evaluating private equity returns. It contrasts theoretical approaches with practical applications, analyzes recent studies and their limitations, and proposes a more comprehensive approach to evaluating both overall asset class performance and individual fund performance.
What is discussed in the chapter on the macroeconomic environment?
The final chapter examines the macroeconomic factors impacting private equity in Germany and France. It covers the historical development of these markets, legal and fiscal environments, fundraising, debt financing, investment opportunities, competition, and exit strategies. It also analyzes how changing market conditions affect the three value-creating levers and investment decisions within these specific geographic contexts.
What are the key objectives of this research?
The main goal is to analyze private equity fund performance, combining theoretical frameworks with empirical findings. It investigates the factors driving returns, explores the implications for investors, and examines performance measurement across regions.
What are the key themes explored in the document?
Key themes include performance measurement of private equity funds, return drivers, risk and return analysis, macroeconomic influences on private equity, and comparative performance across different regions (with a focus on Germany and France).
What are the key words associated with this research?
Keywords include private equity, leveraged buyout, performance measurement, risk, return, fund management, macroeconomic environment, Germany, France, financial leverage, operating leverage, exit multiple, liquidity, and transparency.
What type of audience is this document intended for?
This document is intended for an academic audience, providing a structured and professional analysis of themes in private equity. The detailed table of contents and chapter summaries suggest its use for researchers and students interested in private equity investment, finance, and macroeconomic analysis.
- Quote paper
- Taro Niggemann (Author), 2005, Performance of Private Equity Funds, Munich, GRIN Verlag, https://www.grin.com/document/44362
