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Private Equity for Pension Plans? Evaluating Private Equity Performance from an Investor’s Perspective
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We evaluate private equity (PE) performance using investor-specific stochastic discount factors, and examine whether investors could benefit from changing their allocation to PE. Plans invest in PE funds with higher average risk-adjusted performance. This is mainly due to access to successful PE managers, not superior selection skill. Decomposing returns into risk-compensation and “alpha”, we find that some plans obtain higher PE returns by taking more risk without earning higher, and in some cases earning lower, risk-adjusted returns, broadly consistent with agency problems within plans.
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