Chapter 5 - Designing private equity programs in open markets

Abstract

This chapter discusses the allocation of capital across market segments, vintage years, industries, and geographies, given an overall allocation to private equity as an asset class. Each dimension may provide important diversification gains—subject to a number of investment constraints. Although the market portfolio reflects the market view on returns in individual market segments, deviations from that view result in different portfolio weights. Given the inverse relationship between the overall inflow of capital to private equity funds and their performance, a market-neutral allocation would inevitably result in a concentration of capital in underperforming vintage years. A more balanced distribution of capital across individual vintage years would help investors enhance returns relative to the market benchmark. Similarly, there may be important reasons for investors to overweigh or underweigh individual market segments, industries, or geographies. Such reasons may be grounded in both top-down and bottom-up analyses.