Private Equity

1. From the perspective of an institutional investor, what are the main challenges of investing in private equity?

As mentioned in class, majority of investment firms produce at or below market return, therefore it is crucial that an institutional investor gains access to the best, top tier management firms, however these firms are not accessible to everyone. They often have existing clients, and only take in few new clients. They must gain some relationship with the managers first. Additionally, as managing firms prosper on large funds, they often require high investments. This requirement for capital keeps many potential investors out of the gate of the best managing firms.

Furthermore, the most conventional payment method to the managing firms does not necessarily align with the goals of the investing firms. Meaning that investing firms are situated in a win-win situation. If their investment prosper, they share the gains with the investing firms, however, if they lose on the investments, they are guaranteed with the management fees, which induces the managing firms to become even more risk oriented, causing for a higher percentage of high risk investments, which may not be in the best interest of the investing firms.

Finally, even if an investing firm is outsourced in their private equity investments, they would still need a strong in-house team to ensure that they negotiate and plan the best operation strategies for the investing firm itself. However, as PE is shown to be a challenging trade, many investing firms do not have the human resources for such capability

2. What are some of Yale’s unique approaches to investing in private equity?

Yale’s investment philosophy consists of the following three strategies:

1. Strong belief in equity. Because…

2. Diversification: This is shown through the set allocation to different types of investments, allowing Yale to face the minimal amount of risk.

3. Seek opportunities in less...