exactly how. However, it does not appear that an investor should count on systematically different returns from buyout and venture funds. SOURCES OF RETURN IN PRIVATE EQUITY Based on the preceding discussion, we can draw several conclusions about building a model of private equity for purposes of asset allocation. II Standard risk and return statistics for private equity cannot be measured with any degree of reliability. II Because of the stale valuations, illiquidity, and long commitment periods of the asset class, market weights cannot be used to infer equilibrium expectations. II Because of the different kinds of private equity strategies, any two portfolios may have different risk and return profiles. II Risks in private equity are partly, but not solely, related to risk in the public equity markets. II Returns in private equity are partly related to returns in the public markets, but are partly the result of excess information or skill on the part of the private equity manager. These conclusions suggest that it would be a mistake to look for a single right answer in making private equity allocations. Instead, it might be better to look for a set of "good enough" answers that depend on the characteristics of the portfolio of private equity that a given investor can create. Let us provisionally adopt a simple model for returns in a private equity portfolio, decomposing private equity returns into equilibrium and nonequilibrium sources. Suppose that the investor has a portfolio of public equity. The excess returns, r , for this portfolio have some equilibrium excess return |i and volatility o , as discussed in earlier chapters. The investor wishes to substitute some fraction w of private equity. We will assume that the returns in this particular private equity portfolio have components due to the equilibrium expected return, and due to additional nonequilibrium sources. rp = pV + cc + e (28.1) where p = Market multiplier that accounts for the component of equilibrium return from this public equity portfolio to this private equity portfolio a = Nonequilibrium component of expected return, due to the investor's superior skill or information operating in the private market 8 = Component of risk in this private equity portfolio that is independent of the public market, with volatility o^ It can be seen that the total expected excess return for the private equity portfolio is V-p = P^e + a (28.2)