PE Stages

Please indicate how they differ based on: (return expecations, leverage, stage of investment, and other relevant factors): -Middle Market -Buyout Funds -Start Up/Formative Stage

start up has the highest return and greatest risk because it is not an established business and the failure rate is high. it also has asymmetric info for the investor – not publicly traded, so the info transparency is low. there is a large negative skew in the returns. middle markets and buyout firms invest in established businesses, so they have lower returns, but less risk. buyout funds are mostly a return enhancer, not a diversifier because large cap firms have high correlation with major equity indices. they also have a high degree of leverage that they use to purchase the firms.

Doesn’t schweser say buyout funds have had larger returns and less risk then the middle market ones?

oh, actually you are right. i remember thinking, wow, that sucks, why would you invest in MM then?

that is what i was driving at… wasn’t sure if my notes were wrong… what is the incentive then for MM and start up/formative.? How can Buyout funds provide higher returns and lower risk…

The only reasoning I have is that historically buyout funds have provide higher returns and lower risk but I would think that MM would have expected higher returns along with the higher risk.

start up still has higher than MM and buyout in terms of returns, that is the incentive return: start up > buyout > MM risk: start up > buyout > MM basically, do not invest in MM.

risk for startup is higher then buyout and so is potential return.

CSK: Maybe SChweser is incorrect… because they say the opposite and it isn’t intuitive…

3rd & Long Wrote: ------------------------------------------------------- > CSK: Maybe SChweser is incorrect… because they > say the opposite and it isn’t intuitive… yeah, i remember i saw it and was like WTF, check CFAI end of chapter questions, i think they have one related to that, and i believe it says that potential is higher for startup/vc then for buyout funds

it “has” to be higher for startups because the risk is so high. when a VC funded start up works, it WORKS. you could 10x your money without too much problem, but 90% of them fail. i know you can argue risk / return with MM, but that one is broken for someone reason – the R / R rule does not hold.