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

See all articles by S.P. Kothari

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Konstantin A. Danilov, CFA

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Analysis Group

Gitanjali Swamy

PCRI, Harvard Business School; IoTask

Multiple version iconThere are 2 versions of this paper

Date Written: September 30, 2013

Abstract

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

Kothari, S.P. and Danilov, Konstantin A. and Swamy, Gitanjali, Generating Superior Performance in Private Equity: A New Investment Methodology (September 30, 2013). Journal Of Investment Management (JOIM); Third Quarter 2013. Available at SSRN: https://ssrn.com/abstract=2333759

S.P. Kothari (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Konstantin A. Danilov

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Analysis Group ( email )

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Gitanjali Swamy

PCRI, Harvard Business School ( email )

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HOME PAGE: http://www.privatecapitalresearchinstitute.org/people.php

IoTask ( email )

One Broadway, 14th floor
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HOME PAGE: http://www.iot-ask.com

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