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03 Feb Is Private Equity Still Worth the Risk?

Making any kind of investment involves a certain element and level of risk. However, after the financial crisis in 2008, and with recent regulatory and compliance changes, many individuals and businesses are spending more time researching and investigating the right types of investment vehicles that have a greater rate of return.

Private equity is an asset that was seen as an alternative, but today it has become a crucial part of institutional portfolios. In fact, private equity has become the most significant asset for pension funds, after real estate, of course. As a result, the focus of research and financial analysis has shifted to put more emphasis on returns.

Many organizations and institutions have spent a great deal of time analyzing investment portfolios to determine the source of risk and the overall risk level associated with particular assets and investments. According to average historical data, it has been determined that a great deal of risks have been based on assumptions and the results of taking unnecessary shortcuts.

Is Private Equity Still Worth the Risk?

The majority of organizations and institutions have been successful in trying to make cases for private equity assets. Additionally, after analyzing the impact of private equity asset investments in companies’ portfolios, it is apparent that private equity assets and funds are still an attractive opportunity when compared to public entities, and still well worth the risk.

However, it is still important to monitor and analyze these potential risks. And in order to do this accurately and effectively, reliable data is required.

Can Risk Management Add Value?

In addition to assessing the overall risk level to investing in private equity assets, risk management is believed to be an important step that also adds value. Risk management can add the most value at the beginning stages of investing, during the design, development, and delivery (communication) of the strategy.

Although more organizations and institutions are experimenting with the role of risk managers’ involvement with risk management, many wonder whether risk management should complement or monitor investment management.

Additionally, we have yet to really see whether risk management shows concrete influence on an institution’s portfolio. Also, some institutions believe that identified risks that are perceived threats simply add costs and little no value.

What Are the Opportunities?

So this begs the question: How can investors balance the risks versus opportunities in order to maximize risk-adjusted returns? One potential solution is by “war gaming”, which involves role playing and discussing various perspectives of strategies in competitive environments and under various risk scenarios, such as a lack of resources.

One reason why this strategy is important to identify risks and opportunities is because it establishes the link between risk and strategy, which can help in testing plans, thinking investment strategies through, and “pitching” to potential investors. It is through these exercises that opportunities are identified.

In summary, private equity remains an important asset for investment strategies, and has proven to show a high return on institutions’ portfolios, making it still worth the risk. However, this doesn’t mean that organizations and institutions should go about their investment strategies without paying attention to risk. In fact, risk management can still provide value, depending on how the organization identifies risk and their overall risk management approach and response plan.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.