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Private Equity Performance and Liquidity RiskFrancesco A. FranzoniUniversity of Lugano; Swiss Finance Institute Eric NowakUniversity of Lugano; Swiss Finance Institute Ludovic PhalippouUniversity of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance May 12, 2011 Netspar Discussion Paper No. 06/2010-024 Journal of Finance, Forthcoming Abstract: Private equity has traditionally been thought to provide diversification benefits However, these benefits may be lower than anticipated. We find that private equity suffers from significant 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. Netspar Discussion Paper No. 06/2010-024 (revised version May 2011)
Number of Pages in PDF File: 65 Keywords: private equity, liquidity risk, cost of capital JEL Classification: C51, G12, G23 Accepted Paper SeriesDate posted: August 5, 2010 ; Last revised: September 13, 2012Suggested CitationContact Information
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