| dc.description.abstract | Private equity funds face constraints on the number and type of investments they can
hold due to the time and resources required for counseling activities. This may lead to
specialization in a specific industry or region and leave the funds vulnerable to significant
idiosyncratic risk. This research analyzes the risk-adjusted performance of specialized and
diversified private equity funds using simulations and real-life data. The simulations aimed
to uncover if it was possible to detect the minimum return thresholds for specialized funds
given their risk exposure. The results from the simulation model, where various types
of specialized private equity funds were simulated by combining previous research with
stock market data, were used to formulate a general model that estimated the minimum
required IRR for private equity funds. Finally, the estimated minimum IRR was compared
to the actual return of various private equity funds to analyze the return of specialized
funds relative to diversified funds. The analysis revealed that the simulation model did not
consistently detect the minimum return thresholds for specialized private equity funds. In
addition, an analysis of historical private equity data was conducted to better understand
the effect of diversification on risk and return in private equity. The analysis of historical
data, using a data sample of 1,656 fully liquidated deals from Preqin, indicated that
specialized funds do not consistently outperform diversified funds on a risk-adjusted basis,
possibly due to diminishing returns to scale. However, it appears that the market for
specialized private equity funds is relatively efficient, as investors are able to identify and
invest in the most promising specialized funds, resulting in competitive returns. The
prevalence of specialized private equity funds may be due to the diverse investment needs
and strategies of limited partners or investors in private equity funds. | en_US |
