ZBB 2023, 168
Managing Diversifiable Risk in Private Equity
We use a unique dataset to examine the diversifiable risk of private equity portfolios held by limited partners (LPs). Our simulation results show that diversification across the number deals significantly mitigates idiosyncratic portfolio risk in large LP portfolios. Especially for buyout investments, syndicated deals reduce idiosyncratic portfolio risk, whereas deals shared by several partners within the same LP portfolio increase this risk. Looking at a sample of real LPs, our findings indicate that some investors have particularly high skills in identifying the most diversified general partners and selecting the most diversified funds. Additionally, we find that certain LPs simultaneously invest in several deal partners of a syndicated deal more frequently than chance and that these deals have a favorable risk-return profile.
Inhaltsübersicht
- I. Introduction
- II. Data
- III. How relevant is diversifiable risk management?
- 1. Data
- 2. Methodology
- 2.1 LP portfolio simulation
- 2.2 Determining idiosyncratic risk
- 2.3 Measuring portfolio diversification
- 3. Regression model
- 4. Descriptive statistics
- 5. Results
- IV. Do LPs actively manage portfolio diversification?
- 1. Data
- 2. Methodology
- 3. Results
- V. Does portfolio concentration result from bias or rational portfolio structuring?
- 1. Are overlaps random?
- 1.1 Data
- 1.2 Methodology
- 1.3 Results
- 2. On the performance of deal overlaps
- 2.1 Data
- 2.2 Methodology
- 2.3 Results
- VI. Conclusion
- VII. Appendix
- VIII. References
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- *)Department of Bank Management, University of Cologne
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- **)Department of Bank Management, University of Cologne
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