Diversification in Private Equity Funds: On Knowledge-Sharing, Risk-Aversion and Limited-Attention
28 Pages Posted: 19 Nov 2010 Last revised: 17 Mar 2014
Date Written: 2013
This paper examines diversification as a source of value creation and destruction in private equity (PE) funds. Previous literature has focused on the ‘diversification discount’ in corporations. However, in PE funds, diversification might increase returns by ameliorating managerial risk aversion and facilitating knowledge sharing. I examine a sample of 1505 PE funds and show that industry and geographic diversification can increase PE fund returns. This is likely due to knowledge sharing and learning, not merely risk reduction. Diversification can reduce returns if it spreads staff too thinly across industries or is motivated by risk aversion rather than performance bonuses.
Keywords: Diversification, Private Equity, Venture Capital
JEL Classification: G24
Suggested Citation: Suggested Citation