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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 February 14, 2011 Journal of Financial and Quantitative Analysis (JFQA), Forthcoming EFA 2007 Ljubljana Meetings Paper AFA 2008 New Orleans Meetings Paper Swedish Institute for Financial Research Conference on The Economics of the Private Equity Market Abstract: We develop a new methodology to estimate abnormal performance and risk exposure of non-traded assets from cash flows. Our methodology extends the standard internal rate of return approach to a dynamic setting. The small-sample properties are validated using a simulation study. We apply the method to a sample of 958 private equity funds. For venture capital funds, we find a high market beta and underperformance before and after fees. For buyout funds, we find a relatively low market beta and no evidence for outperformance. We find that self-reported net asset values significantly overstate fund values for mature and inactive funds.
Number of Pages in PDF File: 50 Keywords: Risk exposure, Abnormal return, Private equity JEL Classification: C51, G12, G23 Accepted Paper SeriesDate posted: February 27, 2007 ; Last revised: April 2, 2011Suggested CitationContact Information
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