Abstract

http://ssrn.com/abstract=2180789
 
 

Citations (4)



 


 



Valuing Private Equity


Morten Sorensen


Columbia Business School; National Bureau of Economic Research (NBER); Swedish Institute for Financial Research (SIFR)

Neng Wang


Columbia Business School - Finance and Economics

Jinqiang Yang


Shanghai University of Finance and Economics

June 13, 2013

Netspar Discussion Paper No. 04/2012-041

Abstract:     
We develop a dynamic valuation model of private equity (PE) investments by solving the portfolio-choice problem for a risk-averse investor (LP), who invests in a PE fund, managed by a general partner (GP). Key features are illiquidity, leverage, GP value-adding skills (alpha), and compensation, including management fees and carried interest. We find that the costs of management fees, carried interest, and illiquidity are high, and the GP needs to generate substantial value to cover these costs. Leverage substantially reduces these costs. Finally, we find that conventional interpretations of PE performance measures are optimistic. On average, LPs may just break even.

Number of Pages in PDF File: 59

Keywords: Private equity, alternative investments, illiquidity, portfolio choice, asset allocation, management fees, carried interest, incomplete markets

JEL Classification: G11, G23, G24

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Date posted: November 27, 2012 ; Last revised: July 15, 2013

Suggested Citation

Sorensen, Morten and Wang, Neng and Yang, Jinqiang, Valuing Private Equity (June 13, 2013). Netspar Discussion Paper No. 04/2012-041. Available at SSRN: http://ssrn.com/abstract=2180789 or http://dx.doi.org/10.2139/ssrn.2180789

Contact Information

Morten Sorensen (Contact Author)
Columbia Business School ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Swedish Institute for Financial Research (SIFR)
Drottninggatan 89
SE-113 59 Stockholm, SE-113 60
Sweden
Neng Wang
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

Jinqiang Yang
Shanghai University of Finance and Economics ( email )
777 Guoding Road
Shanghai, Shanghai 200433
China
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