Diversification in Private Equity Funds: On Knowledge-sharing, Risk-aversion and Limited-attention

M. Humphery-Jenner

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Abstract

This paper examines diversification as a source of value creation and destruction in private equity. The literature has focused on the `diversification discount' in corporations. It has not analyzed diversification in PE-funds, where diversification might increase value by ameliorating managerial risk aversion and by facilitating knowledge sharing. Thus, I examine a sample of 1505 PE-funds to show that industry and geographic diversification increases PE-fund returns on average, this is likely due to knowledge-sharing/learning, and is not due to mere risk-reduction or endogeneity. Diversification can also destroy value if it spreads staff too thinly across industries/regions or is motivated by risk-aversion over performance bonuses.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Volume2011-010
Publication statusPublished - 2011

Publication series

NameEBC Discussion Paper
Volume2011-010

Keywords

  • Diversification
  • Private Equity
  • Venture Capital

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    Humphery-Jenner, M. (2011). Diversification in Private Equity Funds: On Knowledge-sharing, Risk-aversion and Limited-attention. (EBC Discussion Paper; Vol. 2011-010). Economics.