Summary

Limited partners who invest in private equity should be aware of how these funds fit into the larger portfolio in regard to risk and return. Alpha should not necessarily be the sole objective for private equity programs; rather, it should be a mix of diversification (for example, buyout strategies or bear market hedges), sector tilts (for example, distressed firms, energy), and explicit beta bets (venture). Interest in GMM methods to measure risk-adjusted returns should be encouraged as prudent measures of risk management, if nothing else. If GMM estimates are not practical, as would likely be the case for small and new programs, then we could still try matching GP investments in firms with other publicly traded firms in relevant GIC sectors and estimating betas and risk-adjusted returns on those publicly traded proxies. Finally, it should be emphasized that without risk-adjusted returns and armed only with IRR estimates, we risk overallocating to investments whose risks are essentially unknown.