Money for nothing? How to get paid for private capital investments – The Property Chronicle
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Money for nothing? How to get paid for private capital investments

The Fund Manager

After lumbering around the $1trn-$2trn assets under management mark for quite some time, central bank policies in the wake of the global financial crisis were a long-awaited shot in the arm for the private capital industry.

Faced with diminishing returns in traditional 60:40 portfolios, institutional investors started to look for a bit more action. Along came private equity. Between 2008 and 2019, PE assets under management volumes more than tripled to $7trn.

Private capital assets under management by asset class, 2000-19

Source: Prequin, OECD

Did capital allocators simply stumble on the ‘holy grail’ of PE investing? 

Well, they had a little help. AUM league tables and smooth double-digit IRR data for non-listed assets helpfully provided by globetrotting marketing teams of large fund managers were simply too appealing to be ignored by capital allocators tasked with lofty return targets.

Rolling three-year horizon IRRs by asset class

Source: Prequin

So, is the story of stellar AUM growth and smooth returns just a self-fulfilling prophecy or are we missing something?

Keeping in mind a Buffet phrase from his 1994 Omaha pilgrimage – “Don’t ask the barber whether you need a haircut” – let’s look at some of the alternative arguments brought forward by the academic community.

Let’s start with a simple observation: An IRR does not measure risk. It measures the discount factor for a series of cash flows to arrive at a net present value of zero.

The Fund Manager

About Martin Schwarzburg

Martin Schwarzburg

Martin Schwarzburg is arranging finance for emerging market infrastructure, energy and real estate projects as an emerging market banker with Brigg Macadam. He previously served as Global COO Real Estate for the Abu Dhabi Investment Authority (ADIA) .

Articles by Martin Schwarzburg

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