The private equity industry has changed substantially since the “Prudent Man” rule was modified in 1978 to give institutional investors the ability to allocate part of their portfolios to alternative assets.
The industry has grown tremendously over the past 30 years, thanks largely to high returns on early investments. Total fundraising by buyout and venture funds increased from approximately $7 billion in 1990 to more than $260 billion just before the financial crisis hit in 2008. The vast majority of assets have come from institutional investors searching for alternatives that will help them meet their return objectives.
Before evaluating the performance of limited partners (LPs), it’s important to understand that private equity, a term used to describe various types of privately placed investments, is riskier than investing in a publicly traded S&P 500 Index fund.
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