Paper Example on Private Equity Investment Strategy

Paper Type:  Case study
Pages:  5
Wordcount:  1209 Words
Date:  2022-05-12


Private equity is an asset class where an investor uses equity securities and debt to purchase shares of private companies or those of public companies that will eventually be delisted from the public stock exchange. Most of the private equity investments are in unquoted companies. The implementation process and its long-term return nature of private equity investment strategy is the major difference between private equity investment and other assets. We will, therefore, discuss the complex implementation process of the private equity majorly in the perspective of David Swensen who was the chief investment officer in Yale University fund since 1985.

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Private equity investment requires a minimum level of capital commitment. It also takes time to effect. This is because it has different aspects to consider such as the vintage year variation and the over-riding objective to recognize and recruit the best investment managers. There are several components of a private equity firm's strategy which are the stage of the targeted companies, the geographies targeted, the value added by the firm, the investment sector, and the entry or exit strategy. The buyout process and venture investing require an application that is different of these skills since they mainly focus on various stages of the life cycle of a company. Private equity investment is categorized into six categories, the seed, start-up, expansion, replacement capital and buyout and special situation.

The strategy in the investment in private equity follows the philosophy of equities, diversification , seeking of less efficient markets , using of outside managers and focus on explicit and implicit incentives that are faced by the managers. Portfolio construction of private equity reflects the objective of high long-term returns and portfolio diversification through reduced correlation to public equity markets. The correlation is among other assets plus the assets under the umbrella of private equities (Swensen, 2005)

There are three major decisions that an investor is faced with in deciding their private equity portfolio. The first decision is the size of the private equity allocation. The investment is inherently illiquid and therefore, the private equity is more attractive to persons who are capable of investing in the long term with no expected liabilities. Based on the need to increase returns, reduce risk and volatility, the investor determines the appropriate amount to allocate into the private equity. The second decision is the determination of the size of the portfolio, which is the number of private equity funds that he intends to commit. Therefore, an investor has to concentrate on investing in a private equity portfolio that is well diversified to avoid risk and control portfolio volatility.

There are different ways of achieving portfolio diversification is to pay attention to all different aspects of private equity philosophy investment. When there is a negative correlation between returns from different stages of private equity, diversification reduces the risk and therefore, it is important to consider that. The other avenue of diversification is geographical diversification through the use of country-specific, regional and pam-European funds. Companies and institutions should also select different managers to reduce the risk of entrusting one specific manager like in the case of Yale University and the ER& M Company. It is also important to compare the performance of funds of the same vintage year. To ensure participation in the good years, it is wiser to invest continuously through the vintage years to bring forth better performance (Swensen, 2009). Finally, a diversified portfolio should cover different industries in the economy. For example, an n investor could allocate funds to a venture whose money would be directed to technological based industries while buyouts focus on technology to a lesser extent which provides exposure to other industries.

The Changes in the Private Equity Industry and the Effect They Have on the David Swensen Strategy for Yale University

The private equity industry is fast growing and changing. At no point has the industry been as competitive as it is today. It is classically showing signs of maturity with the number of private equity firms having tripled between 2000 and 2016 with the assets under management have grown to almost $3,000 billion. There is also increased competition from and among the cash-rich corporates who can absorb high valuations. The competition has led to the decrease of global buyout firms to 4.2 % which is the lowest since the 2008 recession. The growth and increased competition have created unfavorable market conditions for the private equities by pushing valuations high which makes it hard for the fund to find attractive deals. Therefore the returns for this class have begun to suffer from the internal rate of return stagnating at 10 percent per year over the last decade (Swensen, 2009)

To remain afloat, funds are finding an innovative way to remain relevant by changing their current operating models and strategies. For example, investors are moving from the traditional buyout sectors of consumer goods and finance into new areas such as healthcare. There is also an increased focus on portfolio management and no longer rely on financial engineering and leverage to create value for a fund. The firms have also embraced the idea of outsourcing to improve efficiency. They are now entrusting some operations such as tax compliance, fund accounting and treasury to third parties. Another change in the industry is the increase of governing rules and regulations which adds to the market pressures of the fund. The increased regulations have increased the investor scrutiny and rivalry, and more partners are now challenging for favorable payments and in some extreme cases rival against private equity in the acquisition of target firms.

Going by the changing dynamics of the private equity Industry David Swansen's investment strategy on this class of assets could drastically go wrong for Yale University. In the recent Bloomnerg report that although Yale does not reveal its returns by classes, it is probable that they received a hefty return from its investments in leveraged buyouts and venture capital. Mr. Swensen still devotes more of Yale's money to private equity investments than to any other asset class, is not reaping enough of a profit to justify the risk Yale takes when it is locked into private equity funds for years (Vincent, 2013).The risk they are exposed to is mainly on the volatility of spending and the degradation of the purchasing power.


An emerging problem with the Yale model is that it now suggests that they should invest their fund in an alternative class of assets. This idea is however not viable because the whole trade is crowded and are less efficiently priced. Unless Yale has the ability and resources, it is problematic to expect a high level of performance by investing in the alternative classes of investment. This is because of the competition created by the cash-rich corporates that have a better financial muscle compared to Yale University (Widger & Crosby, 2015).Today, there are so many competing firms, and a firm has to be convincing to the buyer that they will give the best price and returns over the set period


Swensen, D. (2005). Unconventional Success: A Fundamental Approach to Personal Investment. Free P.

Swensen, D. (2009). Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment.

Vincent, J. (2013). Profiting from Hedge Funds: Winning Strategies for the Little Guy. Wiley.

Widger, C., & Crosby, D. (2015). Personal Benchmark: Integrating Behavioral Finance and Investment Management.

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Paper Example on Private Equity Investment Strategy. (2022, May 12). Retrieved from

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