Private Equity's Diversification Illusion: Economic Comovement and Fair Value Reporting
Citation
Welch, Kyle T. 2014. Private Equity's Diversification Illusion: Economic Comovement and Fair Value Reporting. Doctoral dissertation, Harvard Business School.Abstract
This study examines how financial reporting practices have shaped private equity's claims to diversification. Despite research showing that private equity lacks unique economic exposure, private equity firms and trade associations continue to promote private equity's diversification as a key investment benefit. I show that returns based on prior methods of valuation understate the economic comovement of private equity with the market, creating a diversification illusion. As private equity valuation methodologies have changed private equity returns reveal increased systematic risk and correlation to equity markets. Moreover private equity firms also encounter higher--not lower--costs when accessing capital under new valuation methods, a finding at odds with public--market research.Terms of Use
This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAACitable link to this page
https://nrs.harvard.edu/URN-3:HUL.INSTREPOS:37367806
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