Private equity performance measurement dilemma – implications for insurance companies’ investments activity at the break of the Volcker rule

Abeer Hassan, Wojciech Mucha,

Research output: Contribution to journalArticle

Abstract

The purpose of this paper is to examine whether the common belief of superior level of private equity (PE) performance is
accurate and what are the implications for insurance companies investing in private equity under Volcker rule regulation.
The design of this paper is as follows. First, the term PE is introduced. Second, the business model of PE is explained
in order to provide the necessary foundation for the critical analysis of PE asset class. Thereafter, essential characteristics
of PE performance measurement are developed to contrast the theory with general practice. Furthermore, eight
comprehensive studies on PE performance are analyzed and explained. Ultimately, implications for insurance companies’
investment activity under Volcker rule are derived.
It is found that PE outperforms public equity, however, not to the extent that is commonly believed. In addition, the degree to
which this return premium rewards the additional risk of PE remains unknown. The most important force behind the level of
performance appears to be a quality of fund management. Moreover, there is a higher dispersion between top-performing
funds return and poorly-performing funds return than there is in public equity. Moreover, under Volcker rule, the competition
to participate in the best performing funds will increase and, therefore, it is recommended for insurance companies to focus
on due diligence of PE firms’ management when dealing with capital allocation decisions.
The study contributes to the large body of literature on private equity performance measurement.
Original languageEnglish
Pages (from-to)59-66
Number of pages8
JournalInsurance Markets and Companies: Analyses and Actuarial Computations
Volume1
Issue number3
Publication statusPublished - 2010

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