A New Method to Estimate Risk and Return of Non-traded Assets from Cash Flows: The Case of Private Equity Funds
Tilburg University - Department of Finance; CentER Tilburg University
University of Hong Kong - Faculty of Business and Economics
University 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
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, G23Accepted Paper Series
Date posted: February 27, 2007 ; Last revised: April 2, 2011
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