Investor discipline: Investments in alternative funds warrant strict investor discipline. Investors have to be careful of cash flow planning and guard against risks of leveraging. Understand your personal risk profile and select a private equity fund that accords appropriate sectoral diversification to your investments.
Fine-tune fund investment strategy: This is the make or break of any investment. A focused investment strategy will often result in superior performance as it takes away ‘randomness risk’ from the fund. This is a key differentiator when it comes to choosing the best fund from the crowd.
Know your fund management team: A fund with focused mandate but backed by poor executors spells disaster. It is most important to consider the background of the fund manager and the management team. Find out about successful exits handled by the team and any unsuccessful investments as well as what they learnt from these.
Prioritise risk management: Strong risk management forms the core of any fund’s efficient management. Keyman risk coverage for the firm and sturdiness of controls that the fund imposes on investee companies are key points. Funds with sponsor commitments are favoured as the institution also has a sizeable skin in the game.
Focus on net returns: Look beyond gross IRRs. The fund’s fee structure and tax efficiency should be investigated to get an idea of the expected return for the investor.