Managing Diversified Portfolios: What Multi-Business Firms Can Learn from Private Equity (2009)

There has been a long tradition of research on the relation between diversification and performance of public corporations in the strategy and finance fields. As for private equity portfolios, research on this matter is rather scarce. From a theoretical as well as from a practical perspective, however, it is interesting to know more about the relation between private equity portfolio diversification and performance, how private equity firms manage their portfolios, and what public companies can learn from private equity firms. These are the research questions which are addressed in Daniel Klier's research. In order to answer these questions, the author uses a two-tier research design. As a first step, he compares the diversification-performance link of public corporations and private equity firms. With respect to the private equity sample and the ope- tionalization of the relevant variables, the study is highly innovative in terms of generating the PE sample from databases like Preqin and Dealogic, constructing a diversification measure from transaction data, and developing comparable perfo- ance measures for private equity firms as well as traditional multi-business firms. As the second step, which is exploratory in nature, the author explores m- agement models of PE firms. The sample of 20 US and Europe-based private equity firms is unique and of high quality, because the author succeeded in getting in-depth interviews with top decision makers of PE firms. The exploratory study extracts three clusters of management models that PE firms are using, and their relation to performance.