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Real Options

In: Private Equity Unchained

Author

Listed:
  • Thomas Meyer

    (LDS Partners)

Abstract

In practice, investment decisions in private equity are irreversible in the sense that mistakes cannot be corrected through trading, at least not at an acceptable cost. Consequently, LPs need to be able to select or be in the position to alter their investments in funds postcommitment. Without the ability to respond in a meaningful way to a new development, the situation becomes a bet. This contrasts with ‘real options’ that can give investors the ability to respond to insights gained over time as a situation gradually becomes clearer. When primarily relying on selection skills, investors in funds are essentially taking a bet, hoping that calculated risks are taken and assuming the outcome is not dependent on pure chance.

Suggested Citation

  • Thomas Meyer, 2014. "Real Options," Palgrave Macmillan Books, in: Private Equity Unchained, chapter 0, pages 235-248, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-28682-6_22
    DOI: 10.1057/9781137286826_22
    as

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