Study: European small and mid-cap buyout is beautiful

Research from Akina Group and private equity scholar Oliver Gottschalg outlines benefits of constructing a portfolio with European lower mid-market to mid-cap funds.  

A private equity portfolio constructed of small and mid-cap funds managed by European funds offers limited partners a better return performance than one concentrated on large cap North American and European buyouts, according to research from Akina Group and HEC Paris professor Oliver Gottschalg.

“Size matters – small is beautiful: The Impact of Portfolio Diversification and Selection on Risk and Return in Private Equity,” a study of 771 mature European and North American primary buyout funds with the vintage years of 1998 to 2007, found that a portfolio balanced by small and mid-cap partnerships will consistently outperform those based on large cap funds.

The analysis confirmed that a diversified portfolio reduces risks, but it also noted that a portfolio comprised of more than 20 funds reduced the benefits of diversification.

The research's goal was to determine the right size and target for an institutional investor that had $200 million dollars to allocate to private equity.

Fund were examined in three size categories: large-cap funds that exceeded $800 million dollars, mid-caps that ranged from $100 million to $800 million and small-cap funds of less than $100 million.

The researchers determined that ultimately European small- and mid-caps exceeded all North American funds, as well as European large-cap private equity funds when it came to performance. The expected average returns of the large-cap funds totaled 1.66x, compared to average returns from the small and mid-cap strategy, which yielded 1.72x.