Private equity: A value adding investment for a private investor?

Greipur Juliusson & Johann Gudmundsson

Student thesis: Master thesis


Studies of private equity performance often face a major problem because of lack of reliable market data and liquidity. This paper addresses these issues by examining listed private equities (LPE) as a proxy for private equity. This allows utilization of standardized performance measures to investigate the performance of this asset class. Hypothesis testing is the chosen tool to answer the research questions. The hypotheses are tested by three performance measures in terms of risk and return. The sample period ranges from 1998 to 2011 and is consequently divided into several sub-periods. Moreover, this paper is conducted in two research parts. Research Part I compares performance of LPE to the global stock market. An international sample of 108 vehicles is identified. After imposing liquidity constraints, a liquid sample of 77 vehicles are used to construct two alternative indices. Based on the data sample and selected performance measures, 67 percent of occasions support the hypothesis that LPE outperforms the global stock market, in terms of risk and return. Other findings are that larger vehicles do not outperform smaller in this market segment and better performing funds did not seem to consistently outperform other funds. LPE indices tend to underperform in bust periods but outperform in all other periods of the sample. Research Part II addresses LPE capabilities in a mixed-asset portfolio. Portfolio capabilities are addressed by comparing an opportunity set of an Initial portfolio consisting of; stocks, bonds and gold, to identical portfolio which is extended with the addition of LPE. The performance measures conclude that 60 percent of occasions support the hypothesis that LPE is able to improve portfolio performance. Moreover, an equally-weighted portfolio and a tangent portfolio support that the LPE portfolio provides additional benefits on top of the Initial portfolio while a minimum-variance portfolio did not. Main conclusions are that, based on the data sample and selected performance measures used in this research, private equity outperforms the global stock market in general and improves a portfolio performance in particular.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2011
Number of pages115