The return to pension funds' private equity investments: New evidence on the private equity premium puzzle

This paper provides new evidence on the private equity premium puzzle suggested by Moskowitz and Vissing-Jørgensen (2002); Even professional investors like pension funds seem to get a poor risk-return tradeoff from investing directly in private equity. We examine whether high risk tolerance, pecuniary and nonpecuniary benefits, overoptimism or political preferences can explain why pension funds despite this invest in private equity. The evidence suggests that mispricing due to overoptimism and subsequent low capital gains can explain the gap in returns to private equity