are your private-equity investments making? The question is easy to answer for other asset classes, such as bonds or publicly traded stocks. All that is required is the price paid at purchase, the price now and the time that has elapsed between the two. It is less obvious how returns for private-equity investments should be calculated. Capital is earmarked for such investments, but it is only “called” once the investment firm has found a project.
Still, this slump might prove more damaging than previous ones, for a couple of reasons. First, allocations to private equity have risen. Pension funds rely on income streams—dividends from companies that they own, coupon payments from bonds and, now, distributions from private equity—to make payments to retirees. A decade or two ago, a lean year from private equity might not have mattered much. Now things are different.
Second, previous lean periods coincided with there being few other investment opportunities for pension funds and university endowments, and plentiful ones for private-equity managers. Some of the best returns private equity has posted have come after crises or the popping of bubbles, when managers could pick up firms for a song. But the past two years have offered few such opportunities.
How might this situation resolve itself? Stockmarkets are reaching all-time highs, and valuations in private markets tend to follow those in public ones. The initial-public-offering pipeline is filling up nicely. Exits are becoming possible. If all this carries on, distributions might well begin to flow. Yet this is just one future scenario.
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