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A New Method to Estimate Risk and Return of Non-Traded Assets from Cash Flows: The Case of Private Equity Funds

53 Pages Posted: 30 Jun 2008 Last revised: 29 Oct 2014

Joost Driessen

Tilburg University - Department of Finance; CentER Tilburg University

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Ludovic Phalippou

University of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance

Multiple version iconThere are 3 versions of this paper

Date Written: June 2008

Abstract

We develop a new GMM-style methodology with good small-sample properties to assess the abnormal performance and risk exposure of a non-traded asset from a cross-section of cash flow data. We apply this method to a sample of 958 mature private equity funds spanning 24 years. Our methodology uses actual cash flow data and not intermediary self-reported Net Asset Values. In addition, it does not require a distributional assumption for returns. For venture capital funds, we find a high market beta and significant under-performance. For buyout funds, we find a low beta and no abnormal performance, but the sample is small. Larger funds have higher returns due to higher risk exposures and not higher alphas. We also find that Net Asset Values significantly overstate fund market values for the subset of mature and inactive funds.

Suggested Citation

Driessen, Joost and Lin, Tse-Chun and Phalippou, Ludovic, A New Method to Estimate Risk and Return of Non-Traded Assets from Cash Flows: The Case of Private Equity Funds (June 2008). NBER Working Paper No. w14144. Available at SSRN: https://ssrn.com/abstract=1152685

Joost Driessen (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

CentER Tilburg University ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Ludovic Phalippou

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

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