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Private investments: Never too much of a good thing

Higher allocations to private investments have shown to be positively related to returns. Over the past 20 years, endowments and foundations with higher portfolio allocations to private investments, especially private equity and venture capital, have seen those allocations outperform their lesser-invested peers.

Data compiled by Cambridge Associates divided their population into three allocation regimes and observed higher overall returns among the portfolios with more dedication to private investments. This outperformance makes sense given the asset classes outperformed public assets over the period, but the data also suggest the relative lack of regard needed in manager selection. Note how the range of the middle quartiles increases as allocations gets wider. The broader range implies a larger distribution of returns an investor can expect, but for the most part the returns are higher among the higher allocation groups than the ones below them. The dartboard is bigger, but so are the odds.

Additionally, Cambridge highlighted the nature of persistency among private investments. The research also shows that endowment and foundations that have historically outperformed their peers in private investments continue to do so. Much of this success is attributable to private fund general partners’ ability to perform well and maintain that performance, as well as limited partners’ greater access to new funds managed by those GPs compared to peers.