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Home | Events Archive | Do Public Equities Span Private Equity Returns?
Seminar

Do Public Equities Span Private Equity Returns?


  • Location
    Erasmus University Rotterdam, Campus Woudestein, ET-14
    Rotterdam
  • Date and time

    March 13, 2025
    12:00 - 13:00

Abstract

We characterize the factors common between public and private equity (PE) returns as well as the factors specific to private and public returns, respectively. Using a comprehensive dataset of PE funds and recent advances in PE fund returns nowcasting at high frequency and factor extraction in a grouped data setting, we show that, albeit over 90% of PE returns may be explained by factors common with the matched public equities, the remaining variation exhibits robust factors that are distinct to PE. These PE-specific factors significantly increase a portfolio’s Sharpe ratio through higher expected return and better diversification. The optimal allocation to PE is positive at the 95% confidence level—at 11 to 24% of risky portfolio, depending on the public equity portfolio characteristics—even after accounting for sampling error and imposing the no-shorting constraint within the PE portfolio. Additionally, we show that the two most commonly used datasets on PE fund returns have virtually identical common factors with public equities, but over half of their PE-specific variation is distinct from one another. Our approach ensures that the alpha we find cannot be mimicked by a tailored-enough portfolio of listed equities. Joint paper with Eric Ghysels (UNC & CEPR), Oleg Gredil (Tulane University).

The paper is publicly available on SSRN.