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Risks, Returns, and Optimal Holdings of Private Equity: A Survey of Existing Approaches

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  • Andrew Ang

    (Columbia Business School, USA)

  • Morten Sorensen

    (Columbia Business School, USA)

Abstract

We survey the academic literature that examines the risks and returns of private equity investments, optimal private equity allocation, and compensation contracts for private equity firms. The irregular nature and limited data of private equity investments complicate the estimation and interpretation of standard risk and return measures. These complications have led to substantial disparity in performance estimates reported across studies. Moreover, studies suggest that the illiquidity and transaction costs inherent in private equity investments have substantial implications for optimal holdings of these assets. While incentive fees in private equity address moral hazard and information agency problems, total fees in private equity investments are very large and incentive fees account for a minority of total compensation.

Suggested Citation

  • Andrew Ang & Morten Sorensen, 2012. "Risks, Returns, and Optimal Holdings of Private Equity: A Survey of Existing Approaches," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 2(03), pages 1-27.
    • Handle: RePEc:wsi:qjfxxx:v:02:y:2012:i:03:n:s2010139212500115
    DOI: 10.1142/S2010139212500115
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    References listed on IDEAS

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    1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
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    3. Alexander Ljungqvist & Matthew Richardson, 2003. "The cash flow, return and risk characteristics of private equity," NBER Working Papers 9454, National Bureau of Economic Research, Inc.
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    5. Hayne E. Leland, 1996. "Optimal Asset Rebalancing in the Presence of Transactions Costs," Finance 9610004, University Library of Munich, Germany, revised 29 Oct 1996.
    6. Bank for International Settlements, 2003. "Incentive structures in institutional asset management and their implications for financial markets," CGFS Papers, Bank for International Settlements, number 21, december.
    7. Katya Kartashova, 2014. "Private Equity Premium Puzzle Revisited," American Economic Review, American Economic Association, vol. 104(10), pages 3297-3334, October.
    8. repec:oup:rfinst:v:25:y::i:11:p:3259-3304 is not listed on IDEAS
    9. Francesco Franzoni & Eric Nowak & Ludovic Phalippou, 2012. "Private Equity Performance and Liquidity Risk," Journal of Finance, American Finance Association, vol. 67(6), pages 2341-2373, December.
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    Cited by:

    1. Buchner, Axel, 2016. "How much can lack of marketability affect private equity fund values?," Review of Financial Economics, Elsevier, vol. 28(C), pages 35-45.
    2. Uppal, Raman & Vilkov, Grigory & Buss, Adrian, 2015. "Where Experience Matters: Asset Allocation and Asset Pricing with Opaque and Illiquid Assets," CEPR Discussion Papers 10437, C.E.P.R. Discussion Papers.
    3. Prencipe, Dario, 2017. "The European venture capital landscape: an EIF perspective. Volume III: Liquidity events and returns of EIF-backed VC investments," EIF Working Paper Series 2017/41, European Investment Fund (EIF).
    4. Andrew Ang & Andrés Ayala & William N. Goetzmann, 2018. "Investment beliefs of endowments," European Financial Management, European Financial Management Association, vol. 24(1), pages 3-33, January.
    5. Axel Buchner, 2016. "How much can lack of marketability affect private equity fund values?," Review of Financial Economics, John Wiley & Sons, vol. 28(1), pages 35-45, January.
    6. Andreas Köhn, 2018. "The determinants of startup valuation in the venture capital context: a systematic review and avenues for future research," Management Review Quarterly, Springer, vol. 68(1), pages 3-36, February.
    7. Wulf Kaal, 2023. "Reputation as Capital—How Decentralized Autonomous Organizations Address Shortcomings in the Venture Capital Market," JRFM, MDPI, vol. 16(5), pages 1-14, May.

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