An additional basket to put your eggs in? A study of listed private equity’s ability to improve portfolio performance.

Abstract: In this study, we examine whether adding Listed Private Equity (“LPE”) to an investment portfolio during the period December 1993 to May 2010 has provided a better risk adjusted return for investors. We also analyse the correlation structure of LPE and MSCI returns and relate them to a number of macroeconomic variables. By using the LPX index family as a proxy for the LPE universe, we show that LPE and stock market returns have been positively correlated for all types of LPE during the period. We also show that this correlation seem to have increased over time and find a historical pattern of higher correlation in volatile periods. However, we show that the correlation has been low enough to provide diversification effects by adding certain types of LPE to an investment portfolio of stocks, hence providing a better risk adjusted return. We also show that GDP growth affected LPE and stock markets differently, while we cannot find evidence for the other chosen macro economic variables to have been affecting LPE and stock markets differently. Consequently, our results suggest that the diversification opportunity from adding LPE to an investment portfolio seem to partly have stemmed from LPE’s different exposure to GDP growth.