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The Journal of Alternative Investments

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The Components of Private Equity Performance: Implications for Portfolio Choice

Will Kinlaw, Mark Kritzman and Jason Mao
The Journal of Alternative Investments Fall 2015, 18 (2) 25-38; DOI: https://doi.org/10.3905/jai.2015.18.2.025
Will Kinlaw
is head of State Street Associates and a senior managing director of State Street Global Exchange in Boston, MA.
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  • For correspondence: wbkinlaw@statestreet.com
Mark Kritzman
is CEO of Windham Capital Management in Boston, MA, and a senior lecturer at MIT’s Sloan School of Management in Cambridge, MA.
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  • For correspondence: kritzman@mit.edu
Jason Mao
is a vice president of State Street Associates and State Street Global Exchange in Boston, MA.
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  • For correspondence: xmao@statestreet.com
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Abstract

Kinlaw, Kritzman, and Mao use a proprietary database of private equity returns to measure the excess return of private equity over public equity and to partition this return into two components: an asset class alpha and compensation for illiquidity. Their evidence suggests that private equity managers, as a group, generate alpha by anticipating the relative performance of economic sectors. The authors assume that manager-specific alpha is fully diluted across a broad universe of private equity managers to interpret the balance of excess return as a premium for illiquidity. Their results suggest that investors can capture the asset class alpha of private equity by using liquid assets such as exchange-traded funds to match the sector weights of private equity investors. This decomposition of private equity performance has important implications for portfolio choice, which Kinlaw, Kritzman, and Mao explore in this article.

TOPICS: Private equity, exchange-traded funds and applications, performance measurement

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The Journal of Alternative Investments: 18 (2)
The Journal of Alternative Investments
Vol. 18, Issue 2
Fall 2015
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The Components of Private Equity Performance: Implications for Portfolio Choice
Will Kinlaw, Mark Kritzman, Jason Mao
The Journal of Alternative Investments Sep 2015, 18 (2) 25-38; DOI: 10.3905/jai.2015.18.2.025

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The Components of Private Equity Performance: Implications for Portfolio Choice
Will Kinlaw, Mark Kritzman, Jason Mao
The Journal of Alternative Investments Sep 2015, 18 (2) 25-38; DOI: 10.3905/jai.2015.18.2.025
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  • Article
    • Abstract
    • RELATED LITERATURE
    • STATE STREET PRIVATE EQUITY INDEX
    • EXCESS RETURN OF PRIVATE EQUITY AND ITS COMPONENTS
    • OPTIMAL ALLOCATION TO PRIVATE EQUITY
    • SUMMARY
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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