Building and Selecting a Private Equity Portfolio

A limited partner is buying a program of future decisions. At commitment, many underlying companies have not yet been identified. Manager selection therefore examines the organization that will make those decisions, the opportunity set it intends to pursue, and the terms under which it will act.

Start with the portfolio's purpose. An institution seeking long-term growth may accept different risks from an investor with near-term spending obligations. Illiquidity is a property of the investment, not an explanation for why it belongs in every portfolio. Capital calls, distributions, and commitment pacing need to fit the investor's broader balance sheet.