Private Equity Woes
Just seven months ago, Goldman Sachs had told its investors that their private equity investments into Swedish battery maker Northvolt was worth 4.29 times what it had paid and this would increase to six times by next year.
Recently, in a huge U-turn of events, Goldman Sachs announced that they will be writing off its entire stake in Northvolt, worth almost $900 million, after Northvolt filed for Chapter 11 bankruptcy this week.
Goldman is by no means alone in making losing investments when it comes to private equity. A study by Morningstar entitled “A fruitless marriage” shows that US equity-focused mutual funds over the past decade failed to deliver returns above the opportunity cost for investors when it comes to private equity investments.
Unrealised Gains
The ten most popular companies account for roughly two-thirds of the total assets invested in private equity. As of June 2024, SpaceX alone accounts for 38% of all mutual fund assets in private companies in the sample studied. Most of the gains in SpaceX are in the form of unrealised gains, similar to how Northvolt was valued at 4.29x return above capital before it filed for bankruptcy.
Since 2014, measuring returns on these private equity investments gave similar returns to just investing in the S&P 500, which can be a proxy for the opportunity cost for investors investing in the U.S.
However, investors in pre-IPO companies are generally prohibited from selling prior to the customary six-month lockup provision. After taking into account lockup provisions, the returns drop to 14.1%. SpaceX’ unrealised gain alone is responsible for the aggregate positive return in private equity investments. Excluding SpaceX, mutual funds have collectively lost -1.3% on their private equity exposure.
Private equity investments can seem exclusive and appealing, like getting invited to a private club, but always consider the opportunity cost and risk before working it into your portfolio.
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