ISRP February Member's Call
Join your fellow ISRP members on Thursday, February 4th, at 1pm ET for a 1 hour presentation from David Turkington and Megan Czasonis where they present their paper (pdf below):
Private Equity and the Leverage Myth
Conventional wisdom regarding the way leverage affects volatility can lead private equity investors to dramatically overestimate risk.
A fundamental precept of corporate finance is that the volatility of a firm's equity is positively related to its leverage with one-to-one correspondence. Following this logic, investors commonly estimate the volatility of highly levered private equity investments by applying a leverage multiple to the volatility of a comparable public equity index. This approach is intuitive, straightforward, and grounded in theory. Unfortunately, it has one important drawback: It is wrong.
Join us for our quarterly call as we have authors of a paper recently published in the Journal of Alternative Investments* present a comprehensive analysis of the relationship between leverage and volatility in public and private markets. They will demonstrate how they arrive at the stubborn conclusion that private equity funds (buyouts, in particular) have volatility that is similar to the public market despite their higher leverage.
* Czasonis, M., W. Kinlaw, M. Kritzman and D. Turkington. 2021. “Private Equity and the Leverage Myth,” The Journal of Alternative Investments, Vol. 23, No. 3 (Winter).
Private Equity and the Leverage Myth 02112020_MIT 591220.pdf
Presenter Bios
MEGAN CZASONIS is a Managing Director for the Portfolio and Risk Research team at State Street Associates. The Portfolio and Risk Research team collaborates with academic partners to develop new research on asset allocation, risk management, and investment strategy. The team delivers this research to institutional investors through indicators, advisory projects, and thought leadership pieces. Megan has co-authored various journal articles and works closely with institutional investors to develop customized solutions based on this research. Megan graduated Summa Cum Laude from Bentley University with a B.S. in Economics / Finance.
DAVID TURKINGTON is Senior Managing Director and Head of Portfolio and Risk Research at State Street Associates. His team is responsible for research and advisory spanning asset allocation, risk management and quantitative investment strategy. Mr. Turkington is a frequent presenter at industry conferences, has published research articles in a range of journals, and led the development of State Street’s systemic risk and turbulence indicators. He is also co-author of the book A Practitioner’s Guide to Asset Allocation. His research has received the 2013 Peter L. Bernstein Award, four Bernstein-Fabozzi/Jacobs-Levy Outstanding Article Awards, and the 2010 Graham and Dodd Scroll Award. Mr. Turkington graduated summa cum laude from Tufts University with a BA in mathematics and quantitative economics, and he holds the CFA designation.
