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Replicating the investment strategy of buyout funds based in the United Kingdom with public-market investments


Journal of Alternative Investments



Authors / Editors

Gottschalg O;Hadass L;Talmor E;Vasvari F

Publication Year



This article assesses whether it is possible to emulate the risk-return profile of buyout funds with comparable public market investments, and concludes that the buyout fund sample used demonstrates a “performance delta” over mimicked public market investment. The performance of a sample of buyout funds is replicated by mimicking the risk characteristics of their transactions with public index data by precisely timing the funds’ cash inflows and outflows net of fees and carry, matching the investments by industry sector, and taking into account the effect of additional leverage replicating the typical financial risk of buyout transactions. The authors measure returns of four investment strategies: the buy-and-hold return on the broad public stock market index; the return on the broad public stock market index based on matched investment timing; the return on the broad public stock market index based on matched investment timing and with additional superimposed financial leverage; and the return on industry-matched public stock market indexes based on matched investment timing and with additional superimposed financial leverage. The authors compare the returns on these four investment strategies with the actual IRR performance of the buyout funds in our sample, which invested predominantly across Europe and through both rising and falling markets. They select sample funds that were raised before 2001 to minimize the measurement error associated with residual NAVs. This research shows that the mimicked public market investments fail to generate the same level of performance as the buyout funds in our sample. The buyout funds achieve performance 11.51% higher than the mimicked public market investments—a gap the authors call “performance delta.”

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