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Risks, Returns, and Optimal Holdings of Private Equity: A Survey of Existing Approaches

32 Pages Posted: 30 Jul 2012  

Andrew Ang

BlackRock, Inc

Morten Sorensen

Copenhagen Business School; Columbia Business School; Centre for Economic Policy Research (CEPR)

Date Written: July 30, 2012

Abstract

We survey the academic literature that examines the risks and returns of private equity (PE) investments, optimal PE allocation, and compensation contracts for PE firms. The irregular nature and limited data of PE investments complicate the estimation and interpretation of standard risk and return measures. These complications have led to substantial disparity in performance estimates reported across studies. Moreover, studies suggest that the illiquidity and transaction costs inherent in PE investments have substantial implications for optimal holdings of these assets. While incentive fees in PE address moral hazard and information agency problems, total fees in PE investments are large and incentive fees account for a minority of total compensation.

Suggested Citation

Ang, Andrew and Sorensen, Morten, Risks, Returns, and Optimal Holdings of Private Equity: A Survey of Existing Approaches (July 30, 2012). Available at SSRN: https://ssrn.com/abstract=2119849 or http://dx.doi.org/10.2139/ssrn.2119849

Andrew Ang

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Morten Sørensen (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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