Private Equity Firms And Long-Term Horizon Investing

One of the main advantages of investing in private equity is the longer-term horizon offered by nonpublic investments compared to public equities investing.

Accordingly private equity returns have beaten the S&P 500 returns in the last 10 years, but lagged the S&P 500 in the last 20 years and performed worse than the Nasdaq Composite both in the last ten years with around 2 % less in the last ten years in yearly return for private equity and by wide 7 % returns less in the last 20 years per year for private equity compared to the Nasdaq Composite, measured by the Internal Rate of Return or the rate that equates to 0 the initial outlay and the final returns.

It seems that the direct management style of private equity companies of non public companies has yielded better results than the general S&P 500 sectors.

However, due to private equity propensity to acquire net cash flow positive companies from established sectors as energy, industrials, financials, materials, consumer staples etc, private equity misses out on the chance to invest in mid capitalization and large capitalization innovative technology companies, according to Wolfteam Ltd.'s view. The main reason is that technology companies are notoriously unprofitable, especially in the initial growth stages.

And the capital managed by private equity firms comes mainly from pension funds, university endowments and other institutions, which by default and by statute invest for the long-term. However, pension funds, university endowments and other institutions require mature investments in relatively safe companies, which have an economic moat, that is. Thus, they can tolerate long-term investment holdings from 5 years onward. In this way, however, private equity firms miss the chance to invest en masse in leading technology companies, because private equity companies do have technology companies in their portfolio. Private equity companies invest indirectly in technology companies by buying up energy companies, investing in data center infrastructure and online merchandise distribution centers.

Thus, private equity companies utilize their long-term investment horizon.