I am confused by the Schweser, which says: Start-up and middle market private companies have more risk and lower returns than investments in established companies via buyout funds. My thinking is : Risk should always be compensated by return at reasonable levels. If start-ups are risker than established companies, then Private Equity funds may lower their valuations for start-ups, by this means, they can get higher returns from start-ups, rather than accept a lower return accompanied by higher risk. Who can help me on this? Thanks in advance
I think schweser is confusing about it. CFA text has a small section in page 289 describing differences in expected return between VC and buyout funds, identifying leverage (buyout, not vc), CF timing (returns come early for buyout funds), and uncertainty (risk, higher for vc) I guess I would not go beyond these 3, regardless of whatever schweser says. Perhaps the problem with VC is that they have higher upside potential… when they success, which according the CFA is in a very limited number of ocassions. And, also, if the % of success of buyout is higher and they do it leveraged… I guess that can be other reason for having a higher expected return than VC. But again, that is only guessing. CFA text does not directly mentions that returns for VC are (or should be) higher than Buyout
To hala_madrid: Thank you very much for answering:) Will check my CFAI textbook again. BTW, , I am now an analyst with a PE firm and according to our internal orientation material, the average return of Buyout fund does exceed that of VC.(before 1999)