5 Steps to Success in Private Capital Investing

February 19, 2019  | by Commonfund

Private Capital

Investors participate in private capital markets for two main reasons: to pursue increased investment return and to add portfolio diversification.

Even well-informed investors who are experienced in publicly traded equities can be uncertain about private market investing. In addition to possessing good public markets knowledge and expertise, they often need an effective resource to help them respond to questions from others involved in the investment process.

This blog is the first in a series that focuses on the fundamental principles of private capital investing and the key steps to building and maintaining a well-structured private capital program.

Key Steps to Success in Private Capital Investing

Learn
The first step of successful private capital investing is to learn what private capital is, what its risks and rewards are, and how it differs from public market investing.

Commit
Building a private capital allocation that makes a difference to your portfolio takes time and dedication. The first step is deciding to make a meaningful allocation to private capital. Then, to implement that allocation prudently, you will need to diversify among several types of private capital investments. Finally, the simultaneous inflows and out- flows of capital over the private capital investment cycle mean that you will need to overcommit funds within your liquidity budget to reach your policy allocation.

Select
Having determined the size of your private capital allocation, you will then want to determine the structure of the portfolio. Private capital investing can take the form of direct investment in private companies, investment in funds organized by private capital managers or investment in a fund of multiple private capital managers (such as a fund of funds or a separate account). There are pros and cons to each approach.

Build
A strong private capital program requires consistent, diversified investing over time. It is also necessary to have— or obtain externally— resources for research and due diligence before you invest; ongoing monitoring afterward; and useful, reliable internal reporting to ensure appropriate controls.

Measure
Private capital investors use a particular set of quantitative and qualitative measures to assess performance. For example, investors often ask about the difference between time-weighted return (“TWR”) and internal rate of return (“IRR”).  In general, TWR is used by the investment industry to measure the performance of funds investing in publicly traded securities.  By contrast, IRR is normally used to gauge the return of funds that invest in illiquid, non-marketable assets—such as buyout, venture or real estate funds.  Find out more about how to calculate these measures here.

While the standard benchmarks used for marketable securities are sometimes applied to private investments, they have limited value. And, as in other investment fields, historical results tell only part of the story.

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Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.