Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting

62 Pages Posted: 25 Jan 2016 Last revised: 6 Feb 2021

See all articles by Erik Stafford

Erik Stafford

Harvard Business School - Finance Unit

Date Written: September 18, 2020

Abstract

The contributions of asset selection and incremental leverage to buyout investment performance are more important than typically assumed or estimated to be. Buyout funds select small firms with distinct value characteristics. Public equities with these characteristics have high risk-adjusted returns relative to common factors. Adding incremental leverage to a publicly traded stock portfolio increases both risks and mean returns in this sample. Direct investments in private equity funds earn lower mean returns than a replicating strategy designed to mimic these key economic features of their investment process with public equities and brokerage loans.

Keywords: Private Equity; Value Investing; Endowments; Investment Management; Asset Pricing

JEL Classification: G11,G12, G23. G32

Suggested Citation

Stafford, Erik, Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting (September 18, 2020). Available at SSRN: https://ssrn.com/abstract=2720479 or http://dx.doi.org/10.2139/ssrn.2720479

Erik Stafford (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-8064 (Phone)
617-496-7357 (Fax)

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