Optimal Allocation to Private Equity

66 Pages Posted: 4 Feb 2021 Last revised: 27 May 2021

See all articles by Nicola Giommetti

Nicola Giommetti

Copenhagen Business School - Department of Finance

Morten Sorensen

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Date Written: January 6, 2021

Abstract

We study the asset allocation problem of an institutional investor (LP) that invests in stocks, bonds, and private equity (PE). PE investments are risky, illiquid, and long-term. The LP repeatedly commits capital to PE funds, and this capital is gradually called and eventually distributed back to the LP. We find that PE investments substantially affect the LP’s optimal allocations. LPs with higher and lower risk aversion follow qualitatively different investment strategies, and PE allocations are not monotonically declining in risk aversion. We extend the model with a secondary market for PE partnership interests to study the implications of trading in this market and the pricing of NAV and unfunded liabilities.

Keywords: Private Equity, Limited Partner, Asset Allocation, Portfolio Problem, Illiquidity, Secondary Market

JEL Classification: G11, G23, G24

Suggested Citation

Giommetti, Nicola and Sorensen, Morten, Optimal Allocation to Private Equity (January 6, 2021). Tuck School of Business Working Paper No. 3761243, Available at SSRN: https://ssrn.com/abstract=3761243 or http://dx.doi.org/10.2139/ssrn.3761243

Nicola Giommetti

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, 2000
Denmark

Morten Sorensen (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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