Private equity performance in financial crises - A theoretical perspective

Rasmus Brock Michelsen & Sebastian Mønster

Student thesis: Master thesis


The global industry of private equity has never had more capital to spend, and deals are at historically high valuations. Further, as COVID-19 is wrecking economic activities across the globe, it raises strong concerns on how private equity funds are expected to do in the event of a crisis.
Research into the intertwinement of macro conditions in financial crisis events and private equity performance is predominantly limited to empirical analyses of the 07-09 crisis. This paper provides answers to how a financial crisis might affect private equity performance and examines how these results depend on the timing and severity of the crisis.
This paper builds on existing literature, establishing a theoretical framework enabling asset-based simulation for PE stakeholders returns under various exogenously defined parameters. Introducing a deterministic crisis event allows for comparison between steady-state and crisis performance, providing insights on the impact of crisis statics.
The paper finds enhanced performance for private equity when investing during a crisis with a significant recovery, regardless of fund characteristics. In the absence of a recovery period, fund characteristics, such as manager skill and leverage, become highly consequential for perfor-mance. These results provide basic insights which open up potential further investigations and considerations regarding private equity as an investment vehicle.

EducationsMSc in Advanced Economics and Finance, (Graduate Programme) Final Thesis
Publication date2020
Number of pages145