Private Equity's Risk-Adjusted Performance and Benefits For Institutional Investors

Abstract

This thesis examines whether private equity (PE) delivers higher risk-adjusted returns and/or portfolio benefits for institutional investors compared to the public investable market from 2005 to 2018. Our analysis indicates that PE has underperformed the public market over this period. However, we identify a 1.5% PE-specific premium not captured by traditional factor models, suggesting PE offers a unique risk premium not obtainable in the public market. We use the Bayesian Markov Chain Monte Carlo algorithm to estimate time-series returns and observe private equity’s exposure to traded factors. Our findings contribute to the literature by using recent data and confirming the persistence of a premium even with an expanded set of risk factors. This implies that institutional investors could benefit from including PE in their portfolios for diversification and additional risk premium, despite recent underperformance relative to the market.