Once again, investors must decide what portfolio strategy to employ. The chart above highlights some interesting dynamics between selection risk and return. A few observations:

• Venture capital has the highest risk, but have you been compensated for that with higher returns? Here, top quartile really does matter.
• Secondaries has a high median, but also one of the highest dispersion of returns. Select your secondary manager well. You will be rewarded.
• Who knew mega/large buyout was so great? Well, some of us did, but this one, as you know, becomes a matter of passionate belief. (“Large managers aren’t hungry and won’t generate good returns….”)
• My goodness, credit rocks.
• The geographic risk profile is largely similar. The return is not, but it’s surprising that the risk doesn’t show more variance.

Let’s shift to another of our favorite charts. It may not be the G.O.A.T., but it holds a special place in our hearts as it gets to the question of what risk you assume by investing in the private markets.

A regular in our market overviews, the periodic table of partnership returns packs a lot of information. (It’s a lovely kaleidoscope of color to boot!)

The color sweep of yellow at the bottom in earlier vintage years, then across the top (along with red) beginning in the 2005-2007 period, shows the dramatic underperformance, and subsequent outperformance, of VC/growth over that time. Similarly, the movement of dark green and pink in the opposite direction shows the shift in distressed investing and natural resources. We’ll point out that infrastructure hovers lower because its return profile is lower. Will those patterns shift again? Many argue that VC is headed into a period of significant underperformance. We’re not sure on that one, though we doubt the yellow colors will remain at the top of the charts. We’ll also reiterate two other points we make year over year:

It’s imperative to know what portfolio strategy you want. It is tempting to pick the hot sectors and avoid the lousy ones, but when you see what the average returns are, the white line across the middle, a strategy of investing in the boring sectors that always hover around that line will get you the returns you want from the private markets. Strategy first, tactics second!

The risk of loss is low across partnership investing. The worst-performing strategies have usually had positive returns. That is a comforting notion as you consider what your risk is in these markets.

Let’s look at the spread of returns.

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