KKR on Volatility in Private Markets

A recent paper by private equity firm KKR argues that, although the increased leverage and smaller company sizes typically included in private equity portfolios  should lead to more volatility in the asset class, private equity delivers more alpha than beta. This according to a recent article in Institutional Investor.

Public company returns, on the other hand, are “driven more by beta, or the overall market, and are therefore more tied to the market’s ups and downs,” the paper contends. That said, the paper suggests that volatility in private markets “is likely understated.”

The paper notes that to determine a more accurate measure of volatility, KKR analysts “remove stale prices from the index, a process that is intended to make private equity returns—which are just quarterly value estimates of assets that don’t trade in the markets—better resemble public market returns.” This metric is called “cross-sectional volatility.”

Using this calculation, KKR determined that between 2000 and 2018, the volatility of global buyout funds was closer to 16 percent than the recorded annualized volatility of 9.3 percent. But the paper states, “There are fundamental differences between listed and unlisted asset classes that sometimes a public market investor may overlook,” and notes, “We value—among other things—the upside optionality that private markets offer relative to traditional liquid markets as well as the ability to time exits and entrances.”