The best-designed PE portfolio is small, study says

When building a private equity portfolio from scratch, using the secondaries market can be an easier way to obtain a desired exposure in a short time.

But there are other factors that need to be taken into account when attempting to build the best-designed private equity portfolio.

In the spring, fund of funds Akina Partners teamed up with Oliver Gottschalg, professor at École des Hautes Études Commerciales (HEC) de Paris, to find out what those criteria are. Akina released the findings of the study in its July Quo Vadis newsletter.

As expected, diversification reduces risks in a private equity portfolio, although that is true only to a certain extent. With more than 15 to 20 funds, the diversification effect becomes negligible, Akina noted.

Based on historical data, Akina and Gottschalg found that European funds have typically outperformed their North American peers. The data also showed that small- and mid-cap funds consistently outperform large-caps.

“Overall, we uncovered strong empirical evidence that a portfolio of approximately 15 well-chosen small- to mid-cap European funds represent the dominant strategy,” Akina wrote in a statement on Tuesday.

Akina and Gottschalg studied a database of more than 770 European and North American primary buyout funds with vintage years between 1998 and 2007 and simulated 1,000 random scenarios of portfolios to figure out the optimal portfolio.