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Performance Measurement and Asset Allocation of European Private Equity Funds

Author: Artus, P., Teïletche, J., Kaserer, C. & Diller, C.
Date: March 2004

What should be the share of private equity in the portfolio of European institutional investors?
This paper argues that the answer is between 5%-10% when the portfolio consists of privateequity (i.e. venture capital and buyout funds), quoted equity and bonds.
The research was conducted on behalf of Invest Europe and carried out by Patrick Artus and Jérôme Teïletche, CDC Ixis Capital Markets Research Department, and by Christoph Kaserer and Christian Diller, Center for Entrepreneurial and Financial Studies (CEFS-TUM) Technische Universität München. The authors of this paper make a case for the introduction of private equity into the framework of modern portfolio theory. Moreover, due to the characteristics of private equity itself, they were required to consider the following aspects within their analysis:

  • The absence of a market providing pricing guidance for the assets in the portfolios of funds on a continuous basis. As a consequence the value of assets in portfolios is the result of an appraisal, leading to potentially stale pricing or a smoothing process. This causes issues with modern portfolio theory as the true volatility and correlation between asset classes can be understated.
  • Determining the right performance metrics in order to compare the returns of private equity with more liquid asset classes.

Geography: Europe

Type of study: Academic working paper, Association, Consulting research

Relevant for: LP, GP All, Fund of funds, Associate

Source: EVCA Research Paper

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