Early-Stage Private Equity: Real Alpha Is Available When Done Right

Abstract

In the venture asset class, positive risk-adjusted return (alpha) has historically been limited to a select group of firms and their investors. The randomness of these funds’ performance suggests the track records are of little value when allocating capital to venture funds. Why do the majority of funds consistently underperform? Will family offices find the traditional venture model sufficient as they seek both reasonable alpha and to have the impact they want? Is the traditional venture model equipped to deliver alpha on this expanding capital base? Is it time for the industry that purportedly funds innovation to innovate itself? In this article, the author explores these questions and more. The result could well be an increased velocity of activity and an emphasis on portfolio returns. Fiduciaries will emphasize investment process over celebrity culture. Portfolio risk will be managed, and alpha will be emphasized. Entrepreneurs will benefit from a lower cost of capital, and investors will realize real, after-tax alpha.

TOPICS: Private equity, portfolio construction, performance measurement