Arthur Korteweg, University of Southern California
Stavros Panageas, University of California-Los Angeles
Anand Systla, University of California-Los Angeles
Abstract: We evaluate private equity (PE) performance using investor-specific stochastic discount factors, and examine whether investors could benefit from changing their allocation to PE. Plans invest in PE funds with higher average risk-adjusted performance. This is mainly due to access to successful PE managers, not superior selection skill. Decomposing returns into risk-compensation and "alpha", we find that some plans obtain higher PE returns by taking more risk without earning higher, and in some cases earning lower, risk-adjusted returns, broadly consistent with agency problems within plans.
Discussant: Vrinda Mittal, University of North Carolina-Chapel Hill
Cynthia Balloch, London School of Economics and Political Science
Federico Mainardi, University of Chicago
Sangmin Simon Oh, Columbia University
Petra Vokata, Ohio State University
Abstract: Using new data on wealthy U.S. households, we provide the first systematic study of private equity investments by individual investors. Contrary to concerns about adverse selection, we find that private equity investments by individual investors perform similarly to those of institutions and outperform public markets. We identify three innovations that enable individuals to invest in private equity: the proliferation of funds with low minimum commitments, pooling capital via advisors, and leveraging advisors’ networks to access fund managers. Our findings demonstrate how advisors and access to private equity funds can enhance household portfolio returns.
Discussant: Joan Farre-Mensa, University of Illinois-Chicago
Abstract: Private debt funds are the fastest growing segment of the private capital market. We evaluate their risk-adjusted returns, applying cash-flow-based methods to form a replicating portfolio that mimics their risk profiles. Accounting for both equity and debt factors, a typical private debt fund produces an insignificant abnormal return to its investors. However, gross-of-fee abnormal returns are positive, and using only debt benchmarks also leads to positive abnormal returns as funds contain equity risks. The rates at which private debt funds lend appear to be high enough to offset the funds’ fees and risks, but not high enough to exceed both their fees and investors' risk-adjusted required rates of return.
