Editorial 2011

German equity investors look back on a lost decade. Anyone who invested in the Dax in the fall of 2000 had achieved a zero return ten years later - and this with strong fluctuations caused by the bursting of the Internet bubble and the recent financial crisis. Especially after the experience of the financial crisis, investors are therefore interested in asset classes that make it possible to smooth out general market fluctuations and generate positive returns over the entire cycle. Investments that can achieve demonstrably consistent alpha are increasingly becoming an indispensable component of institutional portfolios.

A recent study by Golding Capital Partners in collaboration with HEC Paris shows that private equity can regularly generate positive alpha in this sense and thus make an important contribution to the overall portfolio. The study thus refutes some common prejudices. Critics accuse private equity funds of failing to create independent value in the companies they acquire. Above-average returns could only be achieved with massive borrowing, which would put additional strain on private equity companies in bad years.

In the above-mentioned study, it has now been shown that private equity achieves a positive alpha of 7 percent on average above a comparable return on the stock market. This result is even more remarkable when adjusted for factors that are believed to favor private equity, namely leverage, timing and industry selection. In fact, private equity funds are able to fundamentally improve the performance of their companies and thus create value for their investors. They achieve this primarily through improved corporate governance, management involvement, and their expertise in implementing expansion strategies and professionalizing existing structures.