This study presents a comprehensive analysis of the relationship between diversification and performance in private equity. It pioneers the view of industry diversification in private equity firms on a firm level rather than on the level of individual funds, providing the first analysis for comparison with traditional multi-business firms. The study not only draws on a broad range of established research methodologies from the strategic management and finance discipline, it also extends them as a weighted least squares regression is applied in order to account for heteroscedasticity. The study employs either methodology in a sample of 100 private equity firms. The empirical results show a highly consistent positive influence of related diversification on performance, indicating a sweet spot of diversification. In addition, the study provides evidence for a positive impact of experience of private equity firms on investment performance.