Can private equity improve portfolio performance?

Daniel Marthendal Olsen & Mike Kennet Eschen

Student thesis: Master thesis


This thesis strives to contribute to the research on private equity’s portfolio capabilities by quantitatively analysing the hypothesis: Will portfolio performance be improved with respect to risk and return, when private equity is added to an investment portfolio consisting of stocks and bonds? To test the hypothesis we developed a proxy for private equity, using listed private equity, which alleviates the lack of data that usually characterises private equity. In order to measure whether private equity is able to improve portfolio performance, we constructed a benchmark portfolio consisting of stocks and bonds. We then added the private equity proxy to the benchmark portfolio, using a variety of asset allocation models. Based on the resulting portfolios we applied different performance measures, which enabled us to compare the performance of the portfolios with and without private equity added. We established that there exists a diversification potential between private equity and both bonds as well as stocks. We found a very low slightly negative correlation between the private equity trusts and the respective bond indices, and a low to medium level of correlation between the private equity trusts and stock indices. From a theoretical point of view, we could therefore conclude that private equity possessed the potential to improve portfolio performance. We did not find any clear tendencies with regards to private equity’s portfolio capabilities, as different allocation models led to different conclusions. From a quantitative perspective, we found that private equity improved portfolio performance for 52 out of 127 performance figures. Thus, from a strictly quantitative view we could therefore reject the hypothesis. Based on the analysis we concluded that private equity potentially can improve portfolio performance, but based on the selected asset allocation models we were not able to establish this to be true in practice.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2009
Number of pages230