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Buyout funds are the industry darling, but buyout/start-up fund hybrids also are chalking up returns that exceed 25%. Behind the numbers are industry-savvy builders, not break-up artists.
Institutional investors continue to increase commitments to private equity funds to enhance returns. Recent investment activity confirms that the popularity of these alternative investments is up significantly in the first half of 1995.
Even though a record $19.1 billion dollars was committed to private equity funds in 1994, commitments have increased 60% in the first half of 1995. The reason is simple: Prospects for private equity are brighter now than they have been for more than a decade.
Institutional investors also have come to realize that to impact their overall investment returns, the private equity fund allocation needs to be greater than the traditional 5% of assets. Pension funds are allocating assets by type of fund - start-ups, buy-outs, mezzanine debt and a blend of start-up and buyouts called "hybrids."
Institutions that started with traditional start-up fund investments now are adding buyout and hybrid funds to their portfolios. These funds tend to smooth the returns and shorten the portfolio's investment horizon.
According to Venture Economics, buyout funds have been the top performing private equity asset class for the past ten years (IRR = 19%). While buy-out funds have been the darling of the industry, a number of hybrid funds have matched the 25+% returns found in upper-quartile buyout funds.
The move to more aggressive investing by institutional investors could mean adding staff and redefining return requirements. Although making and managing alternative investments generally are acknowledged to be more time consuming, most institutional investors skimp on staffing, despite the lofty returns.
Some pension funds have recently started co-investing in deals with private equity funds to enhance returns even further - an attractive way to become …