Private Equity
Hirtle Callaghan manages diversified, multi-fund programs in private equity that include limited partnership interests in asset classes like venture capital, leveraged buy-outs, European leveraged buy-outs, distressed debt, opportunistic real estate, secondaries and "other." Our diversification includes time as well as type. That is, we build each client's program over several "vintage years."
Each private equity fund often requires a 7 to 10 year commitment. The only way for an investor to become liquid within the commitment period is to sell into the "secondary market." This market is made up of investors who expect to capture extraordinary returns by purchasing limited partnership interests from those who, for some reason, are desperate to sell - great for the buyer, bad for the seller. Consequently, investors should carefully consider liquidity requirements before committing to private equity.
Why would anyone commit to tying up capital for that long? Some say for risk reduction. People in the "private equity business" often tout this asset class as a diversifier. While there is some truth in that claim, it is often overstated. Most of the correlation benefit comes from the fact that private equity assets are only rarely "marked to market." This makes them appear to be far less volatile than public equities, for example, but if they were marked to market every day they would show plenty of volatility.
The real reason to participate in private equity is simple; private equity can produce returns that are substantially greater than the public equity market. Although the "average" private equity fund does not beat public market performance, funds that fall in the top 25% of the private equity universe consistently outperform. This is an inefficient space and a source of what we call "elbow grease alpha" (alpha being a synonym for value added).
Private equity managers can add value in three ways. The first is to buy into a company at an attractive price. The second is to bring real operating expertise to that company - to make it into a more successful enterprise. The third is to sell at an attractive price.
Numbers one and three are largely market driven and really beyond anyone's control. Consequently, we always try to invest with great, experienced operators who are more likely to add value regardless of overall market conditions.
That is what we mean by a "program." A professionally managed, multi-fund pool, diversified by time as well as type and carefully constructed over several years.