Private Equity Characteristics and Implications for Liquid Portfolios

Key Takeaways

• 1.Private equity offers a profile of higher returns, lower volatility, and low correlation compared to public equities, largely due to illiquidity and a lack of frequent mark-to-market valuations.
• 2.The 'smoothing' of private equity valuations results in positive autocorrelation in the first three quarters, reflecting low quarter-by-quarter volatility followed by long-term mean reversion.
• 3.Liquid investment vehicles that track private equity using publicly traded securities often show significantly higher volatility and higher correlation with large-cap public indices like the Russell 1000.

Table of Contents

• Introduction
• Relationship of private equity to public equity
• Private equity return characteristics
• Portfolio considerations
• Implementation
• Summary
• Data note

Report data

Exhibit 1: Annualized geometric mean return and standard deviation, and return/volatility ratios.