The Private Equity Premium Puzzle
National Bureau of Economic Research (NBER); University of California Berkeley, Haas School of Business
Tobias J. Moskowitz
AQR Capital; University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
CRSP Working Paper No. 524
We document that investment in private equity is extremely concentrated. Yet despite the very poor diversification of entrepreneurs' portfolios, we find that the returns to private equity are surprisingly low. Given the large premium required by investors in public equity, it is puzzling why households willingly invest substantial amounts in a single privately held firm with a far worse risk-return tradeoff. We examine various explanations and conclude that private nonpecuniary benefits of control must be large and/or entrepreneurs must greatly overestimate their probability of success in order to explain the observed concentration of wealth in private equity.
Number of Pages in PDF File: 51
Date posted: February 21, 2001