Diversification in Private Equity Funds: On Knowledge-Sharing, Risk-Aversion and Limited-Attention

28 Pages Posted: 19 Nov 2010 Last revised: 17 Mar 2014

See all articles by Mark Humphery-Jenner

Mark Humphery-Jenner

UNSW Business School; Financial Research Network (FIRN)

Date Written: 2013

Abstract

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

Humphery-Jenner, Mark, Diversification in Private Equity Funds: On Knowledge-Sharing, Risk-Aversion and Limited-Attention (2013). Journal of Financial and Quantitative Analysis (JFQA), 2013, Vol. 48, No. 5, pp. 1545-1572, UNSW Australian School of Business Research Paper No. 2011 BFIN 03 , Available at SSRN: https://ssrn.com/abstract=1710948 or http://dx.doi.org/10.2139/ssrn.1710948

Mark Humphery-Jenner (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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