The Risk Profile of Private Equity

Abstract

Private equity is a risky asset, but private equity investments not necessarily so. We look at the risk profile of each type of investment vehicle, and find clear differences. For example in venture capital, the probability of a total loss of capital invested is around 30% for direct investments, and close to zero for funds and funds-of-funds. The probability of a loss for a fund is around 30%, but small for a fund-of-funds. This shows that diversification effects are very important, and need to be taken into account to judge risk. Due to legal or statutory constraints, investors often use less risky vehicles like funds or funds-of-funds.

Keywords: Private equity, venture capital, risk, Basel

JEL Classification: G24