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Capital Dynamics study quantifies the diversification effects of private equity
Private equity portfolios not only offer a source of attractive return, but also diversify investor's equity allocation when constructed properly.
Capital Dynamics, a global private assets manager published a study on the correlation between private and public equity. There is a received wisdom in the market that private equity helps to diversify an investment portfolio. However, until now, little research has been conducted to examine the figures behind this claim, and to investigate how and why private equity can do this", comments Mauro Pfister, Senior Director and Head of Solutions at Capital Dynamics.
Key findings of the study are that private equity portfolios not only offer attractive returns, but also diversify an investors' equity allocation. Furthermore, the study shows that over the past 15 years the average correlation between the European and US buyout markets and public equity has been 80% at the portfolio level. Over the same period, the correlation of the European buyout markets has been considerably lower than that of the US buyout market. The study also provides the insight that concentrated private equity portfolios exhibit lower correlation, and that over-diversification can be avoided by a deliberate fund selection process. The authors of the study also believe that the fundamental differences in the private and public equity investment models will remain, implying that the diversification benefits of investing in private equity will persist in the future.
The fundamental differences of the two asset classes has the effect that private equity outperform public equity because of various reasons. For exemple drives private equity growth and operational improvements as well as it ensures a close alignment of the involved interest groups. Moreover can private equity firms obtain better access to internal informations of their investment targets.
Read the full paper here : https://www.capdyn.com/media/2009/diversify-your-portfolio-with-private-equity.pdf
