Diversifying Private Equity
47 Pages Posted: 18 Feb 2020 Last revised: 21 May 2020
Date Written: February 3, 2020
Uncertainty about manager skill and diversification constraints are hallmarks of investing in alternative assets. This paper quantifies the utility losses to private equity investors arising from these frictions. When calibrated to the data on institutional allocations to private equity and across-fund diversification, our analysis reveals that certainty equivalent returns in PE fund investing are 2-to-8% lower than if inferred from average fund performance levels. The results provide new perspectives on the value of funds-of-funds that operate in the alternative investment space, as well as on manager selection and retention decisions.
Keywords: Private Equity, Venture Capital, Fund of Funds, Fund Performance, Portfolio Choice
JEL Classification: C11, D83, G11, G23, G24
Suggested Citation: Suggested Citation