Risk and Expected Returns of Private Equity Investments: Evidence Based on Market Prices

65 Pages Posted: 20 Mar 2009 Last revised: 25 Feb 2016

See all articles by Narasimhan Jegadeesh

Narasimhan Jegadeesh

Emory University - Department of Finance

Roman Kräussl

Luxembourg School of Finance; Hoover Institution, Stanford University

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2014

Abstract

We estimate the risk and expected returns of private equity using market prices of publicly traded funds of funds holding unlisted private equity funds and publicly traded private equity funds participating directly in private equity transactions. Based on the performance of these two types of listed vehicles, private equity has a market loading close to one and a significantly positive loading on the Fama-French SMB factor. Private equity performance is also negatively related to the credit spread in addition to the substantial exposure to stock market risk. The performance for listed vehicles exhibits greater systematic risk than the private equity performance index, an index based on the self-reported net asset value of unlisted private equity funds, because this index does not reflect market valuation changes in a timely manner. Finally, we find that the market expects unlisted private equity funds to earn annual abnormal returns between -0.5% and 2%.

Keywords: Private equity; risk-return characteristics; funds of funds

JEL Classification: G12

Suggested Citation

Jegadeesh, Narasimhan and Kraeussl, Roman and Pollet, Joshua Matthew, Risk and Expected Returns of Private Equity Investments: Evidence Based on Market Prices (June 1, 2014). Review of Financial Studies, Vol. 28, No. 12, 2015. Available at SSRN: https://ssrn.com/abstract=1364776 or http://dx.doi.org/10.2139/ssrn.1364776

Narasimhan Jegadeesh (Contact Author)

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States

Roman Kraeussl

Luxembourg School of Finance ( email )

4, rue Albert Borschette
Luxembourg, 1246
Luxembourg
+3524666445442 (Phone)

HOME PAGE: http://www.art-finance.com

Hoover Institution, Stanford University ( email )

Stanford, CA 94305
United States

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 344-4311 (Phone)

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