Private Equity Performance Measurement and Its Role in a Portfolio

Abstract

Based on analysis of private equity performance, this article challenges the widespread assumption that private equity investments can provide both exceptional returns and enhanced diversification. Private equity investments entail significant and unique risks, including a necessarily long investment horizon, rigid liquidity constraints, and high bankruptcy rates among portfolio companies, that can make it difficult for investors to realize the potentially superior performance of private equity investments. Furthermore, the article stresses that diversification should not be considered a major benefit of private equity investing. Rather, private equity should be treated as but one small component of a portfolio's allocation to all equity investments, private and public.