March 13, 2025
Should you manage your private equity programme in-house or outsource it?
When an investor begins their private equity programme, it’s often not the result of careful planning or strategic execution. Instead, it can be shaped by sentiment, peer activity, or the funds currently available in the market. Unfortunately, this approach can lead to portfolios burdened with home bias, concentration issues, ad hoc construction, and being “managed” in Excel.
The critical first decision for any investor new to private equity is whether to build and manage their programme in-house or outsource it. This choice impacts not only the portfolio’s structure but also its long-term outcomes. To guide this decision, here are four key areas to consider:
1. Risk
Start by assessing your risk tolerance. How much risk of loss or drawdown are you comfortable taking? Your strategy will need to balance concentration with diversification to align with your risk profile and return expectations.
Also, consider governance mechanisms. Are your oversight structures robust enough to handle the complexities of private equity?
2. Size
Next, ask yourself whether your programme has the critical size needed to be economically viable in-house. A good rule of thumb is at least USD/EUR 300 million per strategy or region. Without this scale, hiring specialists may not be cost-effective.
Conversely, if you’re investing hundreds of millions annually, does your team have the capacity to manage this volume? Over-diversifying into granular sub-scale portfolios can dilute returns as much as being under-diversified.
3. Skill
Private equity is an opaque and skill-based asset class, requiring highly qualified specialists. Once invested, assets are illiquid, so any misstep can be costly.
Consider your team’s existing expertise. Are they equipped to handle your chosen strategy, whether venture capital, secondaries, or co-investments? If not, you’ll need to hire, train, and retain specialists to fill those gaps.
4. Access
Lastly, access is critical. The best-performing funds are often closed to new investors, leaving others with limited opportunities to achieve top-quartile returns.
Even when access is available, commitment sizes can present challenges. Larger funds may require minimum commitments of USD 10 million, which could be prohibitive for some investors. On the other hand, smaller venture or growth funds may struggle to accommodate large commitments from bigger investors.
No One-Size-Fits-All Solution
There’s no universally right or wrong answer. These four areas are interrelated—strength in one can offset a weakness in another. Ideally, investors aim to build strong capabilities across all four dimensions.
Whether you choose to manage your private equity programme entirely in-house, outsource it completely, or find a hybrid approach, critically evaluating your capabilities in these areas is key.
Stay tuned for more insights on how to approach these decisions and navigate the complexities of private equity investing.
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