Private Equity Performance and Liquidity Risk
Francesco A. Franzoni
Università della Svizzera italiana (University of Lugano); Swiss Finance Institute
University of Lugano; Swiss Finance Institute
University of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance
August 29, 2011
Journal of Finance, Forthcoming
Swiss Finance Institute Research Paper No. 09-43
Private equity has traditionally been thought to provide diversi cation bene ts. However, these benefi ts may be lower than anticipated. We find that private equity suffers from signifi cant exposure to the same liquidity risk factor as public equity and other alternative asset classes. The unconditional liquidity risk premium is close to 3% annually and, in a four-factor model, the inclusion of this liquidity risk premium reduces alpha to zero. In addition, we provide evidence that the link between private equity returns and overall market liquidity occurs via a funding liquidity channel.
Number of Pages in PDF File: 80
Keywords: Private equity, Liquidity risk, Cost of capital
JEL Classification: C51, G12, G23
Date posted: December 4, 2009 ; Last revised: September 13, 2012
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