How Resilient are Pe/Vc Returns to Real Shocks?

Abstract

This paper examines the resilience of private equity (PE) and venture capital (VC) returns to economic and market shocks, exploring their role as alternative asset classes within diversified institutional portfolios. Despite the increasing allocation to these illiquid and untransparent assets, little is understood about their shock resilience, econometric exogeneity, and diversification properties when combined with liquid assets such as equities, bonds, and commodities. We use a Vector Autoregression (VAR) framework to analyze PE and VC performance over thirty years, assessing their reactivity and adaptability to fluctuations in traditional asset classes and macroeconomic indicators. Our findings show that while PE and VC are sensitive to immediate market changes, they demonstrate substantial long-term resilience, regaining equilibrium aftershocks. This reveals that PE/VC is an ideal asset class for diversification within institutional portfolios as a buffer against market volatility without sacrificing returns.

Keywords: Private equity, Shock sensitivities, Institutional portfolio, Quantile vector autoregression, Impulse response