Portfolio Concentration in Private Equity

Abstract：

Using novel holding level size and return data from Burgiss, we document several new findings on portfolio concentration in venture capital and buyouts during the period of 1997 -2017. Firstly, on the aggregate level, industry concentration degree is rather stable along the years, with a value of 0.4 for VC and a value of 0.2 for buyouts, meaning a large space for portfolio industry choices. For the continent level geographic concentration degree, it decreases from 0.8 to 0.4 implying more location choices in recent years. In contrast, the fund level concentration degree is higher and has more variations. Secondly, we find a negative relationship between industry concentration degree and fund return for buyouts and a positive relationship between geographic concentration and return for both VC and buyouts where the return is measured as the value-weighted public market equivalence (PME). Thirdly, the positive role of portfolio concentration is more prominent for larger funds.  These results suggest that, unlike in mutual funds, both information acquisition costs and risk diversification are important in the portfolio choice in private equity.

Speaker Biography：

Celine Yue Fei is a postdoctoral research associate at University of North Carolina, Kenan Institute of Private Capital. Her research focuses on venture capital, private equity and small business financing. Her work has explored the role of governments in fostering the development venture capital market in China. Her current work is to understand the portfolio choice in private equity based on holding level data, the impact of (mis)valuation on investors’ capital allocation in venture capital, and the impact of IPO market development on the VC market.