Private Equity Funds: Valuation, Systematic Risk and Illiquidity

61 Pages Posted: 6 Mar 2008 Last revised: 15 Jan 2015

See all articles by Axel Buchner

Axel Buchner

University of Passau; CEPRES - Center of Private Equity Research

Christoph Kaserer

Technische Universität München (TUM)

Niklas Wagner

Passau University

Date Written: September 30, 2014


We derive a novel model of the cash flow dynamics and equilibrium values of private equity funds. Based on intertemporal capital asset pricing results for an investor with logarithmic utility, the model explains a life cycle of systematic fund risk and fund value. The closed form solution allows us to predict the typical dynamics of fund values, time varying systematic risk as well as expected returns, and considers market illiquidity. Our model calibration illustrates that a European sample of funds has an average risk adjusted excess value of 14 percent relative to committed capital, which amounts to average illiquidity costs of 1.4 percent annually. We show how equilibrium expected fund returns, systematic risk, and illiquidity discounts decrease over fund lifetime. As compared to venture capital funds, buyout funds on average exhibit lower systematic risk, faster payback, lower life cycle maximum values, but higher initial excess values.

Keywords: private equity, venture capital, buyout, fund life cycle, equilibrium fund values, illiquidity and expected returns, time-varying systematic risk

JEL Classification: G24, G12

Suggested Citation

Buchner, Axel and Kaserer, Christoph and Wagner, Niklas F., Private Equity Funds: Valuation, Systematic Risk and Illiquidity (September 30, 2014). Available at SSRN: or

Axel Buchner (Contact Author)

University of Passau ( email )

Innstraße 27
Passau, 94030

CEPRES - Center of Private Equity Research ( email )

Max-Joseph-Strasse 7
Munich, 80333

Christoph Kaserer

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
+49 89 289 25489 (Phone)
+49 89 289 25488 (Fax)


Niklas F. Wagner

Passau University ( email )

Innstrasse 27
Passau, 94030

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