Hostname: page-component-586b7cd67f-r5fsc Total loading time: 0 Render date: 2024-11-22T16:00:04.305Z Has data issue: false hasContentIssue false
  • English
  • Français

A New Method to Estimate Risk and Return of Nontraded Assets from Cash Flows: The Case of Private Equity Funds

Published online by Cambridge University Press:  20 April 2012

Joost Driessen ,
Tse-Chun Lin  and
Ludovic Phalippou
Joost Driessen
Affiliation:
Faculty of Economics and Business, Tilburg University, PO Box 90153, 5000 LE, Tilburg, The Netherlands; [email protected]
Tse-Chun Lin
Affiliation:
School of Economics and Finance, University of Hong Kong, Room 928, KKL Building, Pokfulam Road, Hong Kong; [email protected]
Ludovic Phalippou
Affiliation:
Said Business School, University of Oxford, Park End Street, Oxford, OX1 1HP, UK. [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

We develop a new methodology to estimate abnormal performance and risk exposure of nontraded assets from cash flows. Our methodology extends the standard internal rate of return approach to a dynamic setting. The small-sample properties are validated using a simulation study. We apply the method to a sample of 958 private equity funds. For venture capital funds, we find a high market beta and underperformance before and after fees. For buyout funds, we find a relatively low market beta and no evidence for outperformance. We find that self-reported net asset values significantly overstate fund values for mature and inactive funds.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 3 , June 2012 , pp. 511 - 535
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ang, A.; Hodrick, R. J.; Xing, Y.; and Zhang, X.. “The Cross-Section of Volatility and Expected Returns.” Journal of Finance, 61 (2006), 259–299.CrossRefGoogle Scholar
Chen, P.; Baierl, G. T.; and Kaplan, P. D.. “Venture Capital and Its Role in Strategic Asset Allocation.” Journal of Portfolio Management, 28 (2002), 83–89.CrossRefGoogle Scholar
Cochrane, J. H. Asset Pricing. Princeton, NJ: Princeton University Press (2005a).Google Scholar
Cochrane, J. H. “The Risk and Return of Venture Capital.” Journal of Financial Economics, 75 (2005b), 3–52.CrossRefGoogle Scholar
Cumming, D. J.; Siegel, D. S.; and Wright, M.. “Private Equity, Leveraged Buyouts and Governance.” Journal of Corporate Finance, 13 (2007), 439–460.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Bonds and Stocks.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Gompers, P., and Lerner, J.. “Money Chasing Deals? The Impact of Fund Flows on Private Equity Valuation.” Journal of Financial Economics, 55 (2000), 281–325.CrossRefGoogle Scholar
Jensen, M. C. “The Performance of Mutual Funds in the Period 1945–1964.” Journal of Finance, 23 (1968), 389–415.Google Scholar
Jones, C., and Rhodes-Kropf, M.. “The Price of Diversifiable Risk in Venture Capital and Private Equity.” Working Paper, Columbia University (2004).Google Scholar
Kaplan, S. N., and Schoar, A.. “Private Equity Performance: Returns, Persistence, and Capital Flows.” Journal of Finance, 60 (2005), 1791–1823.CrossRefGoogle Scholar
Kaplan, S. N., and Stein, J. C.. “How Risky Is the Debt in Highly Leveraged Transactions?” Journal of Financial Economics, 27 (1990), 215–245.CrossRefGoogle Scholar
Korteweg, A.“Financial Leverage and Expected Stock Returns: Evidence from Pure Exchange Offers.” Working Paper, University of Chicago (2005).CrossRefGoogle Scholar
Korteweg, A., and Sorensen, M.. “Risk and Return Characteristics of Venture Capital-Backed Entrepreneurial Companies.” Review of Financial Studies, 23 (2010), 3738–3772.CrossRefGoogle Scholar
Lerner, J., and Schoar, A.. “The Illiquidity Puzzle: Theory and Evidence from Private Equity.” Journal of Financial Economics, 72 (2004), 3–40.CrossRefGoogle Scholar
Ljungqvist, A., and Richardson, M.. “The Cash-Flow, Return and Risk Characteristics of Private Equity.” Working Paper, New York University (2003).CrossRefGoogle Scholar
Metrick, A., and Yasuda, A.. “The Economics of Private Equity Funds.” Review of Financial Studies, 23 (2010), 2303–2341.CrossRefGoogle Scholar
Moskowitz, T. J., and Vissing-Jorgensen, A.. “The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?” American Economic Review, 92 (2002), 745–778.CrossRefGoogle Scholar
Phalippou, L., and Gottschalg, O.. “The Performance of Private Equity Funds.” Review of Financial Studies, 22 (2009), 1747–1776.CrossRefGoogle Scholar