Portfolio Management in Private Equity

84 Pages Posted: 1 Sep 2023

See all articles by Gregory W. Brown

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area

Celine Yue Fei

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

David T. Robinson

Fuqua School of Business, Duke University; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Multiple version iconThere are 2 versions of this paper

Date Written: August 31, 2023

Abstract

General Partners (GPs) in private equity face a trade-off between focusing their skills and effort on fewer investments to earn higher returns, or investing more broadly to reduce risk through diversification. Using a novel, deal-level dataset of 5,925 global investments from 1999 to 2016, we show that these portfolio considerations are important for understanding fund-level private equity returns. The largest investments in PE funds typically have the lowest returns on average, but are also the least risky. Returns and risk are both increasing in industry or geographic concentration. And while GP-specific return variation (e.g., skill) only accounts for 4%-6% of the total return variation of a typical investment, it accounts for around 40% of the return variation at the fund level. These findings show that GPs use portfolio construction, and not just deal selection, to seek risk-adjusted fund-level returns.

Keywords: private equity, buyouts, portfolio management, deal sizing, deal sequencing

JEL Classification: G11

Suggested Citation

Brown, Gregory W. and Fei, Celine Yue and Robinson, David T., Portfolio Management in Private Equity (August 31, 2023). Kenan Institute of Private Enterprise Research Paper No. 4557858, Available at SSRN: https://ssrn.com/abstract=4557858 or http://dx.doi.org/10.2139/ssrn.4557858

Gregory W. Brown (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Celine Yue Fei

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

David T. Robinson

Fuqua School of Business, Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0120
United States
919-660-8023 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
436
Abstract Views
1,417
Rank
124,260
PlumX Metrics