By Michael Flaherty
NEW YORK (Reuters) - A large portion of private equity funds have failed to beat the Standard & Poor's 500 Index over a 20-year period, Erik Hirsch, Chief Investment Officer at Hamilton Lane, said on Monday, dispelling the myth that most buyout firms beat the index.
Of the 462 U.S. buyout funds raised between 1978 and 2004 that the advisory firm has examined, he said, only 51 percent beat the S&P, while a mere 35 percent beat the S&P plus the 500 basis point premium many firms promise investors.
"The bottom line is that selection matters," Hirsch said at the Reuters Hedge Fund and Private Equity Summit being held in New York this week. "It's all about the quality of manager."
Amid record-breaking fund-raising levels and huge private equity deal volumes, false perceptions about private equity investing have emerged, he said. Among them is the idea that a vast majority of the buyout investors beat equity markets -- and beat them soundly.
In fact, Hirsch said, approaching private equity investing under this assumption is a mistake.
"We think one of the big mistakes in this asset class ... is that people have huge portfolios," Hirsch said. "You get quite a bit of diversification by going into 20-25 funds."
Private equity firms typically buy companies or take controlling positions in them on behalf of the firm's investors, which tend to be wealthy families or institutions, such as pension funds and university endowments.
Private equity deals, or buyouts, are financed with debt, and the acquiring firm attempts to restructure the company, cut costs, and sell it later to another company or to the public market in the form of an initial public offering.
© Thomson Reuters 2008. All rights reserved.
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