Optimizing Investment Portfolio Allocation: Analyzing Trends and Dynamics of Alternative Investments in Estate Planning
Received: 7 November 2024 | Revised: 3 December 2024, 21 December 2024, 27 December 2024, and 30 December 2024 | Accepted: 1 January 2025 | Online: 2 February 2025
Corresponding author: Vijai Pillarsetti
Abstract
Private Equity (PE) plays a unique role in estate planning due to its potential for high returns and complexity. Therefore, understanding its pricing dynamics is essential for effectively incorporating it into an estate plan. The current research examines the complexities of optimizing investment portfolio allocation by analyzing the pricing dynamics of PE funds in secondary markets. The study acknowledges the challenges posed by the inherent risks, illiquidity, and long-term nature of PE investments. It focuses on the impact of PE investments on Limited Partners' (LP) optimal allocations. Typically, LPs commit capital to PE funds, which is gradually called and eventually distributed back to them. The research reveals that the PE investments significantly influence LPs' optimal allocations, with differing strategies being observed among LPs with varying risk aversion levels. The study's findings reveal that PE allocations do not consistently decrease in risk aversion, suggesting the presence of nuanced decision-making processes. Depending on an LP's risk aversion, they adopt one of two distinct investment strategies. A conservative LP, characterized by higher risk aversion, holds relatively more liquid reserves of stocks and bonds compared to illiquid PE investments. This LP tends to be unconstrained and to remain close to an interior optimum, leaving it largely unaffected by the illiquid and long-term nature of PE investments. Moreover, the model extends to incorporate a secondary market for PE partnership interests, allowing an exploration into the implications of trading in this market and the pricing dynamics of the Net Asset Value (NAV) and unfunded liabilities. The proposed analysis provides valuable insights into the intricate interplay between the risk aversion, PE investments, and secondary market dynamics, offering guidance to LPs navigating the complex landscape of alternative investments.
Keywords:
Private Equity (PE), estate planning, limited partners, Net Asset Value (NAV), unfunded liabilities, investmentsDownloads
References
W. Hanif, T. Teplova, V. Rodina, M. Alomari, and W. Mensi, "Volatility spillovers and frequency dependence between oil price shocks and green stock markets," Resources Policy, vol. 85, Aug. 2023, Art. no. 103860. DOI: https://doi.org/10.1016/j.resourpol.2023.103860
S. Papathanasiou, D. Vasiliou, A. Magoutas, and D. Koutsokostas, "The dynamic connectedness between private equities and other high-demand financial assets: A portfolio hedging strategy during COVID-19," Australian Journal of Management, Jul. 2023, Art. no. 03128962231184658. DOI: https://doi.org/10.1177/03128962231184658
A. Devine, A. Sanderford, and C. Wang, "Sustainability and Private Equity Real Estate Returns," The Journal of Real Estate Finance and Economics, vol. 68, no. 2, pp. 161–187, Feb. 2024. DOI: https://doi.org/10.1007/s11146-022-09914-z
R. Jelic, W. Aussenegg, and D. Zhou, "Private Equity (PE) and Governance in Secondary Buyouts." Social Science Research Network, Rochester, NY, USA, Oct. 17, 2022.
A. Giovannetti and D. Pipic, "Shaking hands with common foes: Clique premium and information diffusion in private equity networks," International Review of Financial Analysis, vol. 86, Mar. 2023, Art. no. 102527. DOI: https://doi.org/10.1016/j.irfa.2023.102527
D. Cumming, M. Z. Khan, N. U. Khan, and Z. U. Khan, "Size matters: Unpacking the relationship between institutional investor size and private equity asset allocation within diverse institutional contexts," Journal of International Financial Markets, Institutions and Money, vol. 92, Apr. 2024, Art. no. 101958. DOI: https://doi.org/10.1016/j.intfin.2024.101958
X. Pan, "The network effect and helpfulness of electronic word-of-mouth: understanding the online consumer reviews in social networking sites," Ph.D. dissertation, University of Reading, Berkshire, UK, 2019.
J. Dominic and A. Joseph, "Dynamics of Venture Capital and Private Equity Investments in India: An Empirical Analysis," Journal of Risk and Financial Management, vol. 16, no. 11, Nov. 2023, Art. no. 475. DOI: https://doi.org/10.3390/jrfm16110475
J. Dahya and B. H. T. Wu, "Social capital, syndication, and investment performance: Evidence from PE investing in LBOs," International Review of Financial Analysis, vol. 95, Oct. 2024, Art. no. 103306. DOI: https://doi.org/10.1016/j.irfa.2024.103306
H. Kraemer-Eis, J. Block, A. Botsari, F. Lang, S. Lorenzen, and W. Diegel, "Entrepreneurial finance in Europe and the Russian war against Ukraine," The Journal of Technology Transfer, vol. 49, no. 6, pp. 2273–2305, Dec. 2024. DOI: https://doi.org/10.1007/s10961-024-10067-9
E. Kieffer, F. Pinel, T. Meyer, G. Gloukoviezoff, H. Lucius, and P. Bouvry, "Evolutionary Learning of Private Equity Recommitment Strategies," in 2021 IEEE Symposium Series on Computational Intelligence (SSCI), Orlando, FL, USA, Dec. 2021, pp. 1–8. DOI: https://doi.org/10.1109/SSCI50451.2021.9660088
M. Cerullo, K. K. Yang, J. Roberts, R. C. McDevitt, and A. C. Offodile, "Private Equity Acquisition And Responsiveness To Service-Line Profitability At Short-Term Acute Care Hospitals," Health Affairs, vol. 40, no. 11, pp. 1697–1705, Nov. 2021. DOI: https://doi.org/10.1377/hlthaff.2021.00541
H. C. Demirel, W. Leendertse, and L. Volker, "Mechanisms for protecting returns on private investments in public infrastructure projects," International Journal of Project Management, vol. 40, no. 3, pp. 155–166, Apr. 2022. DOI: https://doi.org/10.1016/j.ijproman.2021.11.008
"Data solutions you can trust | Preqin. " https://www.preqin.com/data/our-data
The retail intermediary market data 2023. London, UK: Financial Conduct Authority (FCA), 2024.
Downloads
How to Cite
License
Copyright (c) 2025 Vijai Pillarsetti, L. Madhava Rao
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors who publish with this journal agree to the following terms:
- Authors retain the copyright and grant the journal the right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) after its publication in ETASR with an acknowledgement of its initial publication in this journal.
