Generating Superior Performance in Private Equity: A New Investment Methodology
Journal Of Investment Management (JOIM); Third Quarter 2013
22 Pages Posted: 1 Oct 2013 Last revised: 10 Mar 2017
Date Written: September 30, 2013
This paper provides a new investment methodology for private equity portfolios that applies principles of investment management used in traditional asset classes. We apply Modern Portfolio Theory (MPT) with rational selection of portfolios that are on the efficient frontier of risk-reward optimality, to back-test the performance of private equity (PE) investment portfolios against a corresponding sub-portfolio that is closer to the efficient frontier. The methodology is a guide for investors to build PE portfolios designed to generate superior performance; our experiments show that it is possible to get a performance improvement as large as 20% in some public pension fund portfolios.
Keywords: Private equity, fund performance, efficient frontier, portfolio theory
JEL Classification: G00
Suggested Citation: Suggested Citation