The Cash Flow, Return and Risk Characteristics of Private Equity
New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)
Matthew P. Richardson
New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)
January 9, 2003
NYU, Finance Working Paper No. 03-001
Using a unique dataset of private equity funds over the last two decades, this paper analyzes the cash flow, return, and risk characteristics of private equity. Unlike previous studies, we have detailed cash flow data for each fund, rather than aggregate or accounting returns. We also know the exact timing of investments and capital returns to investors and the number and types of companies each fund invested in. We document the draw down and capital return schedules for the typical private equity fund, and show that it takes several years for capital to be invested, and over ten years for capital to be returned to generate excess returns. We provide several determining factors for these schedules, including existing investment opportunities and competition amongst private equity funds. In terms of performance, we document that private equity generates excess returns on the order of five to eight percent per annum relative to the aggregate public equity market. Moreover, while we estimate the betas of the private equity funds' portfolios to be greater than one, we show that on a risk-adjusted basis the excess value of the typical private equity fund is on the order of 24 percent relative to the present value of the invested capital. One interpretation of this magnitude is that it represents compensation for holding a 10-year illiquid investment.
Number of Pages in PDF File: 43
Keywords: Venture capital, Private equity, Liquidity
JEL Classification: G24, G12
Date posted: March 18, 2003
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