Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting
62 Pages Posted: 25 Jan 2016 Last revised: 6 Feb 2021
Date Written: September 18, 2020
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: Suggested Citation