For institutional investors in private equity, a recommitment strategy to achieve a desired asset allocation is at least as important as the decision about the asset allocation itself. Because cash flows (both capital drawdowns and distributions) for the asset class are highly unpredictable up front, achieving the desired allocation in a portfolio context represents a multiperiod dynamic optimization problem. This article's approach determines new commitments to private equity funds based on distributions, the amount needed to adjust asset class weights back to the desired portfolio asset allocation (rebalancing amount), as well as the current investment degree of the portfolio. Annually recommitting distributions and the rebalancing amount-both weighted by the inverse of the current period investment degree-optimizes institutional investors' private equity asset allocation.

Recent empirical research shows mixed evidence of return persistence for private equity (PE). Still, the conventional rationale that many PE investors employ during fund manager selection focuses on prior fund returns as a means of predicting future top-quartile performance. Finding fund managers based on past top-quartile performance is not straightforward. First, considerable leeway exists for managers to define top-quartile performance, which explains why much more than one-quarter of all funds claim to be classified as top-quartile. Second, PE groups often raise subsequent funds before the previous funds’ performance can be accurately measured and classified as top-quartile. This process hinders selecting a manager based on the assumption of return persistence. Thus, using a holistic due diligence process might offer insights into identifying future top-quartile PE managers.

The article reveals structural differences in private equity fundraising in Asia compared with developed markets. Exit opportunities and the amount of credit provided by the banking sector are found to be strong determinants of new funds raised. Unlike in developed markets, however, emerging markets are negatively impacted by the amount of credit provided by the banking sector: Funding of transactions stands in direct competition with banks in these markets as more credit is provided by the banking sector. Fewer investment opportunities remain for private capital. The negative relationship with credit provided by the banking sector is reflected in different business approaches. In developed markets, banks financially leverage private equity transactions to a substantial degree to magnify returns to investors. In emerging markets, private equity transactions use less leverage. Differentiating along investment stages, economic growth and research and development (R&D) expenditures are found to be of particular importance to venture capital. For later-stage leveraged buyouts, the degree of recent deals negatively impacts funds raised. As competition for attractive deals among private equity funds intensifies, investor return expectations deteriorate and fundraising is reduced as a consequence.

The article looks at how the adoption of fair value accounting principles by the private equity industry has affected returns. Since the early 2000's the industry has been gradually evolving towards adopting fair value or mark-to-market principles. In this light, returns are expected to show much more volatility than they used to in the past with investments mainly carried at the lower of cost or written down value. For this research, exclusive access to renowned proprietary databases of Cambridge Associates and Venture Economics was granted. It is shown that with the implementation of fair value accounting, US private equity buyout returns have become more aligned with public comparables. Private equity characteristic time-lags within the range of one to three quarters persist. Fair values in the light of these findings not only satisfy investors’ demands for more accurate valuations, but also enhance benchmarking opportunities with public comparables.