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A New Method to Estimate Risk and Return of Non-Traded Assets from Cash Flows: The Case of Private Equity FundsJoost DriessenTilburg University - Department of Finance; CentER Tilburg University Tse-Chun LinUniversity of Hong Kong - Faculty of Business and Economics Ludovic PhalippouUniversity of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance June 2008 NBER Working Paper No. w14144 Abstract: We develop a new GMM-style methodology with good small-sample properties to assess the abnormal performance and risk exposure of a non-traded asset from a cross-section of cash flow data. We apply this method to a sample of 958 mature private equity funds spanning 24 years. Our methodology uses actual cash flow data and not intermediary self-reported Net Asset Values. In addition, it does not require a distributional assumption for returns. For venture capital funds, we find a high market beta and significant under-performance. For buyout funds, we find a low beta and no abnormal performance, but the sample is small. Larger funds have higher returns due to higher risk exposures and not higher alphas. We also find that Net Asset Values significantly overstate fund market values for the subset of mature and inactive funds.
Number of Pages in PDF File: 53 working papers seriesDate posted: June 30, 2008Suggested CitationContact Information
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