14 May 2024 Research Foundation

The Economics of Private Equity: A Critical Review

  1. Alexander Ljungqvist
Private equity is a $3 trillion asset class, attracting many investors. This literature review synthesizes the main insights of the academic literature on private equity, focusing on its performance, value creation, and key aspects for investors.
The Economics of Private Equity: A Critical Review Read PDF
The Economics of Private Equity: A Critical Review


Private equity (PE) has grown into a sizable asset class, with many institutional investors allocating significant portions of their portfolios to PE. This critical review of the academic literature focuses on PE funds that acquire mature companies. Topics covered include PE fund performance, value creation, and key aspects relevant to investors in PE funds.

Regarding PE performance, PE funds have historically outperformed public market indices after fees, but it is unclear whether this outperformance persists when adjusted for risk, leverage, and illiquidity. Measuring performance, however, is complicated by the opaque and illiquid nature of the asset class.

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In terms of value creation, PE portfolio companies undergo significant operational changes during the ownership period, but it remains an open question whether PE ownership caused these changes or if they would have occurred anyway. The literature review also discusses the potential for PE to create social value.

From the limited partner perspective, the literature emphasizes the importance of manager selection and the challenges of investing in PE, including diseconomies of scale, potential conflicts of interest, and the rise of co-investment and direct investment programs. The review also touches on recent developments in PE, such as the growth of secondary buyouts, general partner–led secondaries, and increasing focus on environmental, social, and governance (ESG) considerations.

In conclusion, the literature review suggests that although PE has received significant attention from financial economists, open questions for future research remain as the asset class continues to evolve and innovate.

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