What this module covers
The errors investors make in private markets are not random. The same few recur, across asset classes and across market cycles. This module describes seven of them, what each looks like in practice and why it causes damage, and then the three causes most of them share.
- Chasing returns
- Underestimating illiquidity
- Concentration
- Overlooking fees
- Skipping due diligence
- Decisions made under pressure
- Investing without a written plan
- The causes the mistakes share
Chasing returns
The pattern begins with a pitch: "This fund returned 35% last year." The error is letting a number like that drive the decision.
A single strong year says little in any market, and less in private markets than in public ones. A high recent return has several possible explanations, and only the first is reassuring:
- The strategy is working.
- The market cycle happens to favour the strategy at present, and may turn.
- The manager is taking more risk than its peers to produce the result.
- The holdings are being valued aggressively. Most private holdings have no market price, so a reported return often rests on the manager's own valuation of investments that have not been sold.
Investors who commit after a fund's best year are exposed to the reversal if the explanation turns out to be the second, third or fourth. The practice that avoids this starts from the strategy: how the returns are produced, and whether they make sense given the risk taken and the environment in which they were earned. Recent performance is one input to that judgment, not the judgment itself. Module 11 describes how a track record is read in context, including the difference between realized and unrealized returns.