investors consider it as part of an overall portfolio? In this chapter, we will consider private equity to be any ownership interest not publicly traded, anywhere in the world, except for real estate. Under this definition, private equity is an enormous asset class, including everything from local dry-cleaning shops to very large industrial enterprises, and from new start-ups with one or two employees and no revenues to firms of long standing with thousands of employees and stable revenue streams. Compared with public equity, private equity has some advantages as an investment. Fundamentally, the fact that these companies are private means that information about them may not always flow efficiently. This creates an opportunity for managers with superior skill or information to generate unusually large returns. On the other hand, this very lack of widely available information makes it more difficult to apply the equilibrium approach developed in this book. In this chapter we will discuss the basic rationale for private equity investments, the mechanics of investing in private equity, and limitations on information about valuation and returns. Finally we shall examine an approach to including private equity in a global asset allocation strategy. WHY PRIVATE EQUITY?_____________________________ Private equity sometimes has the reputation of being an alternative asset class, with the suggestion that it is somehow new or strange. A moment's reflection will show that this is not the case. Markets for publicly traded assets are relatively new, with histories of up to a few centuries and substantial size starting only in the nineteenth century. Most prior economic ownership, therefore, must have been private. And indeed, private equity today is in many ways an old-fashioned asset class. The basic assumptions underlying modern finance usually start with the following ideas: II Information about economic opportunities spreads quickly to all market participants. II Markets are highly liquid.