Diversifying Private Equity

39 Pages Posted: 18 Feb 2020 Last revised: 16 Mar 2020

See all articles by Oleg Gredil

Oleg Gredil

Tulane University - A.B. Freeman School of Business

Yan Liu

Purdue University

Berk A. Sensoy

Vanderbilt University - Finance

Date Written: February 3, 2020

Abstract

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

Gredil, Oleg and Liu, Yan and Sensoy, Berk A., Diversifying Private Equity (February 3, 2020). Available at SSRN: https://ssrn.com/abstract=3535677 or http://dx.doi.org/10.2139/ssrn.3535677

Oleg Gredil (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Yan Liu

Purdue University ( email )

West Lafayette, IN 47907-1310
United States

HOME PAGE: http://yliu1.com

Berk A. Sensoy

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

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