Investing in private equity funds may not be so great after all.
While the raw rates of long-term returns are often above other assets classes like stocks, bonds and real estate, investors essentially break even when illiquidity and other costs such as manager fees and risk of losing money are taken into account, according to a new academic study released by the National Bureau of Economic Research.
Private equity funds are illiquid because investors must typically agree to commit their money to the investment manager for about 10 years. Investors can move in and out of other more liquid assets classes like stocks and bonds on a virtually second by second basis.
"The essence of our paper is that the costs of illiquidity may be large," Morten Sorensen, co-author of the "Valuing Private Equity" paper and an associate professor at Columbia Business School, said by email. "In our baseline specification, the costs of illiquidity are larger than the costs of fees, and all these costs combined are sufficiently large that an average limited partner just breaks even."