Weigh risk and return across private equity strategies, and against other asset classes, when setting a strategic allocation

Within private equity, venture capital has the widest dispersion, the highest loss rates and the most skewed payoffs. Growth equity sits in the middle. Buyouts depend on leverage and credit conditions. Against listed equity, private equity is equity risk made more intense by leverage, concentration and illiquidity. Investors expect an illiquidity and skill premium, but manager dispersion is wide, making selection central. Reported returns are smoothed, which understates beta and volatility. Model buyouts as levered public equity plus an illiquidity premium, and spread commitments across vintages. A sound recommendation ties the allocation to the investor's horizon and liquidity budget. The trap is treating private equity as a diversifier because its reported correlation with stocks is low.