Diversifying Private Equity

51 Pages Posted: 18 Feb 2020 Last revised: 8 Jan 2021

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: Fabuary 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. Funds-of-funds can alleviate diversification constraints at the cost of fees-on-fees, and may be worth it for small, constrained investors. Chasing managers with high past performance entails high under-diversification costs that outweigh the benefits for most investors.

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 (Fabuary 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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