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Private EquityOpportunities and Risks$
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H. Kent Baker, Greg Filbeck, and Halil Kiymaz

Print publication date: 2015

Print ISBN-13: 9780199375875

Published to Oxford Scholarship Online: August 2015

DOI: 10.1093/acprof:oso/9780199375875.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2020. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 07 July 2020

Diversification Benefits of Private Equity Funds-of-Funds

Diversification Benefits of Private Equity Funds-of-Funds

Chapter:
(p.463) 25 Diversification Benefits of Private Equity Funds-of-Funds
Source:
Private Equity
Author(s):

Axel Buchner

Markus Kuffner

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199375875.003.0025

The double layer of fees in funds-of-funds is controversial, especially during periods of high economic performance in which the extra fees can be large. This chapter takes an investor’s view when examining the conditions in which an investment in funds-of-funds pays off despite the fees-on-fees. The chapter considers an investor’s degree of risk aversion and applies a certainty equivalent level of final wealth. Thus, determining whether the benefits outweigh the additional costs requires knowledge of the investor’s degree of risk aversion. This chapter shows that funds-of-funds substantially reduce the risk of private equity (PE) investments through diversification especially if management adds value by carefully selecting the underlying funds leading to a higher acceptance of fees.

Keywords:   private equity, funds-of funds, fees, certainty equivalent, diversification, risk aversion

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