The Components of Private Equity Performance: Implications for Portfolio Choice

Abstract

Kinlaw, Kritzman, and Mao use a proprietary database of private equity returns to measure the excess return of private equity over public equity and to partition this return into two components: an asset class alpha and compensation for illiquidity. Their evidence suggests that private equity managers, as a group, generate alpha by anticipating the relative performance of economic sectors. The authors assume that manager-specific alpha is fully diluted across a broad universe of private equity managers to interpret the balance of excess return as a premium for illiquidity. Their results suggest that investors can capture the asset class alpha of private equity by using liquid assets such as exchange-traded funds to match the sector weights of private equity investors. This decomposition of private equity performance has important implications for portfolio choice, which Kinlaw, Kritzman, and Mao explore in this article.