PE exposure can enhance public equities portfolio performance, says Pantheon

In a bid to further compare the performance of private and public equities, Pantheon set out to examine the risk/return impact of including private equity in a portfolio of US public equities. The firm found that, over the long run, private equity assets appear to behave similarly to publicly listed equities, but with "potential significant alpha and diversification benefits".

The firm estimated a beta of 1.05 between private equity and public equities, suggesting that the potential transaction value of private equity investments evolves broadly in line with public market returns. Furthermore, Pantheon calculated that the correlation between private equity and public equities stood at 70% across the sample used.

But, according to the study, private equity added value to a portfolio of public equities via an annualised alpha of 3.16%, suggesting that adding private equity to a portfolio of randomly selected public equities could increase risk-adjusted returns.

In light of this, Pantheon also set out to calculate an optimal allocation to private equity within the selected public equities portfolio. The firm argues for a theoretical 38% allocation to private equity in order to maximise the risk/return profile. Taking into account private equity's illiquid nature, the corrected allocation stands at 23.6%, according to Pantheon.

The complete study and its methodology is available on the Pantheon website.

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