Pensions & Investments - Buyout Funds Not Immune to Volatility

April 21, 2020

Buyout Funds Not Immune to Volatility

Private equity’s buyout funds, have become a significant source of returns for institutional investors. In Pensions & Investments’ latest survey, public pension fund’s private equity allocations averaged 10.1% compared with 8.2% five years earlier, with buyout funds making up nearly two-thirds of the total. The asset class’ seemingly low volatility makes it attractive when risk-adjusting those returns; however, subjective and lagged valuations can mask volatility and create a false sense of security.

Using Burgiss-managed data, MSCI’s ‘‘nowcast’’ model estimates values of buyout funds based on public and private market data. The model shows general partners reporting fund values at a premium during times of market stress but steep discounts during rebounds.