51 Pages Posted: 25 Jan 2016 Last revised: 8 Sep 2017

Date Written: May 20, 2017

Abstract

Private equity funds tend to select small firms with low EBITDA multiples. Public equities with these characteristics have high risk-adjusted returns after controlling for common factors. Hold-to-maturity accounting of portfolio net asset value eliminates the majority of measured risk. A passive portfolio of small, low EBITDA multiple stocks with modest leverage and hold-to-maturity accounting produces an unconditional return distribution that is highly consistent with that of the pre-fee aggregate private equity index. The passive replicating strategy represents an economically large improvement in risk- and liquidity-adjusted returns over direct allocations to private equity funds, which charge estimated fees of 3.5% to 5% annually.