Why Defined Contribution Plans Need Private Investments

Wednesday October 16, 2019
  • White Paper


We examine the impact of including private investment funds into diversified (e.g., balanced and target date fund) portfolios that otherwise hold only public stocks and bonds. Our analysis utilizes a comprehensive sample of 2,515 U.S. private equity funds to create simulated portfolios for 1987-2017 that invest part of their overall equity allocation in these funds. We find that investing in private funds always increases average portfolio returns and reliably increases Sharpe ratios (return per unit of risk). The results are robust when accounting for the inclusion of higher fees for the private portfolio and while randomly selecting a few funds from each vintage year (e.g., 10), suggesting that the results are feasible in practice for many investor types.


Gregory W. Brown, UNC Kenan-Flagler Business School
Bert-Klemens Kuhn, UNC Kenan-Flagler Business School
Wendy Hu, Burgiss