Question

Should expected returns to private equity be different from expected returns to public equity? Why? Provide some justifications to your answer?

Answer 1

Private Equity Returns: Is PE Losing Its Advantage? ... Over the past 30 years, US buyouts have generated average net returns of 13.1%, compared with 8.1% for an alternative private-market performance benchmark, based on the Long-Nickels public market equivalent (PME) method and using the S&P 500 as the proxy.Private equity investors work with portfolio companies over the long-run, often 5-8 years. Hedge funds investments can be as short as a few weeks. So private equity teaches you the art of long-term view. Private equity also gives you the ability to work closely with the company over an extended period of time.

Private Equity

Most companies start out as private, but a public company can also sell out its public shares and go private if it finds the benefits to be greater. One of the biggest differences in private versus public equity is that private equity investors are generally paid through distributions rather than stock accumulation.4 Private equity investors usually receive distributions throughout the life of their investment.

Public Equity

Most investors are more aware of public equity offerings. Generally, public equity investments are safer than private equity. They are also more readily available for all types of investors. Another advantage for public equity is its liquidity, as most publicly traded stocks are available and easily traded daily through public market exchanges.

Transitioning from a private to a public company or vice versa is complex and involves multiple steps. A company that would like to offer its shares publicly will usually solicit the support of an investment bank.

The offering of a private placement will generally be very similar to an initial public offering. Private companies often work with investment banks to structure the offering. Investment bankers help with structuring the value of private shares or paid in capital as is utilized in the offering. Investment bankers can also help companies test the investment demand and set an investment date. Unlike public investments, private companies may also solicit commitments over time from investors that help with long-term planning.