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Asset Allocation with Private Equity

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  • Arthur Korteweg
  • Mark M. Westerfield

Abstract

We survey the literature on the private equity partnership arrangement from the perspective of an outside investor (limited partner). We examine how the partnership arrangement fits into a broader portfolio of investments, and we consider the methods and difficulties in performance measurement, both at the fund level and at the asset class level. We follow with a discussion of performance persistence and the skill and pricing power of both general and limited partners. We continue by examining the limited partner’s problem of managing commitments and investments over time while diversifying across funds in light of both idiosyncratic and systematic shocks. We close with a summary of recent work on optimal portfolio allocation to private equity. Throughout, we consider how empirical and theoretical work match the particular institutional details of private equity, and we identify 27 open questions to help guide private equity research forward.

Suggested Citation

  • Arthur Korteweg & Mark M. Westerfield, 2022. "Asset Allocation with Private Equity," Foundations and Trends(R) in Finance, now publishers, vol. 13(2), pages 95-204, July.
    • Handle: RePEc:now:fntfin:0500000062
    DOI: 10.1561/0500000062
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    References listed on IDEAS

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    1. Yihong Xia, 2001. "Learning about Predictability: The Effects of Parameter Uncertainty on Dynamic Asset Allocation," Journal of Finance, American Finance Association, vol. 56(1), pages 205-246, February.
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    Cited by:

    1. Daniel Dimitrov, 2025. "Untangling Illiquidity: Optimal Asset Allocation with Private Asset Classes," Working Papers 827, DNB.
    2. Kurtović, Hrvoje & Markarian, Garen, 2024. "Tail risks and private equity performance," Journal of Empirical Finance, Elsevier, vol. 75(C).

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