The largest risk in Private Equity

In private equity, the main risk lies not only in market conditions or valuations, but above all in the quality and stability of the management teams. This risk, which is often underestimated, can have a decisive impact on a fund’s performance, particularly when external events weaken organizations. Certain fund cohorts clearly illustrate the importance of the investment environment. Many funds launched before the 2008 financial crisis were exposed to high valuations, significant leverage, and cyclical sectors. Despite these unfavorable conditions, median returns remained positive over the long term, demonstrating the asset class’s overall resilience. However, this average masks significant disparities among funds.Instances of underperformance or capital losses are most often linked to team-related issues. During periods of stress, such as economic crises, portfolios can come under pressure, which may lead to internal disagreements or even the departure of key members. In small-scale structures, such departures can severely disrupt fund management and compromise value creation. To mitigate this risk, one approach is to prioritize robust, institutionalized management platforms with large, structured teams. This type of organization is more resilient to potential departures and helps maintain continuity in the investment strategy. Even in segments such as the lower mid-market, which often consist of smaller funds, integration into larger platforms can offer an additional level of security through the sharing of resources and expertise.In-depth analysis of the teams is thus a central element of the selection process. It relies in particular on the assessment of internal cohesion, the distribution of capital and incentives, staff stability, the quality of new hires, and the reputation of key members. Alignment of interests, particularly through the teams’ personal investment in the funds they manage, is also a key factor. Risk management in private equity therefore largely depends on a rigorous selection of teams, whose quality and stability directly determine the funds’ ability to deliver sustainable performance.