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The Journal of Alternative Investments

The Journal of Alternative Investments

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Article

Why Invest in Private Equity? A Comparison of Private Equity and Stock Market Returns

Kevin Marchel and Garen Markarian
The Journal of Alternative Investments Summer 2019, jai.2019.1.074; DOI: https://doi.org/10.3905/jai.2019.1.074
Kevin Marchel
is a graduate student at the WHU–Otto Beisheim School of Management, Burgplatz 2, Vallendar, Germany
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Garen Markarian
is a professor at WHU–Otto Beisheim School of Management, Burgplatz 2, Vallendar, Germany
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Abstract

Often lauded for offering superior performance, investing in private equity (PE) is costly as investors have to pay fees and committed capital is illiquid for a long-time horizon: Could returns be replicated by levered investments in public markets? This article aims to emulate leveraged buyouts in the public market by purchasing undervalued and poorly performing stocks typical of buyout targets. Similar to LBO transactions, simulated investments are financed partly by debt and realized after five-year holding periods. The authors’ investment strategy yields IRRs of up to 13.2%, less than the average of 14.2% reported in studies that analyze PE performance, but without the long periods of illiquidity that characterize the PE market. Finally, in time periods of economic boom, the authors’ simulated investments outperform those of PE. The authors offer a new investment perspective for investors without the adverse costs of PE.

TOPICS: Private equity, performance measurement, portfolio construction

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The Journal of Alternative Investments: 25 (1)
The Journal of Alternative Investments
Vol. 25, Issue 1
Summer 2022
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Why Invest in Private Equity? A Comparison of Private Equity and Stock Market Returns
Kevin Marchel, Garen Markarian
The Journal of Alternative Investments Apr 2019, jai.2019.1.074; DOI: 10.3905/jai.2019.1.074

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Why Invest in Private Equity? A Comparison of Private Equity and Stock Market Returns
Kevin Marchel, Garen Markarian
The Journal of Alternative Investments Apr 2019, jai.2019.1.074; DOI: 10.3905/jai.2019.1.074
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    • BACKGROUND AND RESEARCH QUESTION
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