Private Equity: Strategies for Improving Performance

Existing research suggests the average private equity* manager does not create excess returns over public markets net of fees. We confirm this result using a factor model that allows for leverage, illiquidity and volatility clustering. The model explains 70 to 90 per cent of the variation in returns. Our model also gives rise to two methods of improving conventional private equity performance via a synthetic exposure. We test the robustness of the synthetic methods using historical and simulated data.