Finding the Limit: Examining the Risk-to-Return Ratio in Private Market Performances

While risk-adjusted returns are hardly a novel concept, given the present period of volatility and pursuit of safe havens we investigate how geography impacts risk and return across investment styles. We also examine how an investor’s risk profile may benefit from diversifying across geographies rather than investment styles with the same geographic focus. As such, we charted these factors against each other to give a broader picture of how geography may add benefits or risks to any private strategy.

Key Takeaways

We see a noticeable flatness to the data. Examining North America, for instance, reveals much of the returns over different strategies tend to group around 20% or 12%, with the main variable being how much risk the strategy spends to make that gain.

The more aggressive strategies such as Venture and Growth Equity deliver near 20% returns, but with a considerable loss ratio to balance. More stable strategies such as Buyout, Infrastructure, or Credit deliver near 12%, but with a considerably lower loss ratio.

By contrast, Global investments as a whole exhibit much more consistent risk, with many delivering close to half of the U.S. loss ratios. However, they have a much higher variance of returns: spread out from 10% to 30%. Europe sits in between some segments with its high variance in return for consistently low risk, while other segments have much higher risk for fairly low returns.

When zoomed out, the data is highly chaotic, and certain obvious trends emerge:

• Strategies well known for high risk/return profiles deliver exactly that across geographies (Venture, Growth Equity).

• Strategies with more conservative, safe approaches trade that return for lower losses (Buyout, Credit, Infrastructure), yet oddities remain.

• Styles that offer innate diversification of strategy such as Secondaries, Fund of Funds, and Co-Investment actually exhibit striking similarities in return and risk regardless of geography.

This potentially indicates that diversification benefits drive towards a geography-agnostic bound of risk and performance, regardless of the underlying strategies.

Looking Ahead

While our chart from Cobalt data does not use any time-series data (and therefore cannot be extrapolated into the future), we can connect the present volatility to a likely future desire for safer, more consistent returns globally.

In furtherance of that goal, we may see worldwide efforts to increase diversification and reduce concentration. This may be done within geographies, rather than expanding into other geographies. Most entities that have the mandate to expand geographically likely already would have done so. Therefore, benefits to geographic concentration with style diversity seem promising.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.