Strategic Asset Allocation: Private equity

In this second report in our strategic asset allocation series, we examine the role of private equity in portfolio construction. Using Preqin data, we analyze the implications of adding private equity exposure to investment portfolios, including its impact on returns, risk, and diversification

• Private equity allocations are expanding among institutional investors, with diversification, attractive absolute returns, and strong risk-adjusted returns most commonly cited as key drivers of private equity investment

• Access to smaller companies with higher growth potential may represent a diversification benefit of private equity; some strategies also offer lower correlation with public equities

• Allocating to private equity can push out the efficient frontier in model portfolios, even when accounting for returns smoothing

• Scenario testing using Aladdin modeling suggests private equity may offer some downside protection when replacing public equity in portfolios – especially in a simulated stagflationary environment