Friday Seminar - "Optimal Allocation to Private Equity" - Morten Sorensen (Tuck School of Business, Dartmouth College)
"Optimal Allocation to Private Equity"
Abstract: We study the portfolio problem of an investor (LP) that invests in stocks, bonds, and private equity (PE) funds. The LP repeatedly commits capital to PE funds. This capital is gradually contributed and eventually distributed back to the LP, requiring the LP to hold a liquidity buffer for its uncalled commitments. Risk aversion substantially affects the optimal investment strategy and PE allocation, and despite PE being riskier this allocation is not monotonically declining in risk aversion. As an extension, we introduce a secondary market for PE investments to study the economics and implications for optimal investments.
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