The literature shows that private equity returns are generally no higher than the market return on all publicly traded equity, yet entrepreneurial households invest more than 70% of their private holdings in a single private company in which they have an active management interest, according to data from the 1989, 1992, 1995, and 1998 Survey of Consumer Finances. Considering that the returns to private equity investment seem too low given their risk, the authors write, it is hard to understand why.
Data suggest that a diversified portfolio of public equity offers a far more attractive risk-return trade-off than that achieved by most entrepreneurs. There are several possible explanations for entrepreneurs' insistence on concentrating their investments in private equity.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.