80 Pages Posted: 4 Dec 2009 Last revised: 13 Sep 2012
Date Written: August 29, 2011
Private equity has traditionally been thought to provide diversi cation bene ts. However, these benefi ts may be lower than anticipated. We find that private equity suffers from signifi cant exposure to the same liquidity risk factor as public equity and other alternative asset classes. The unconditional liquidity risk premium is close to 3% annually and, in a four-factor model, the inclusion of this liquidity risk premium reduces alpha to zero. In addition, we provide evidence that the link between private equity returns and overall market liquidity occurs via a funding liquidity channel.
Keywords: Private equity, Liquidity risk, Cost of capital
JEL Classification: C51, G12, G23
Suggested Citation: Suggested Citation
Franzoni, Francesco A. and Nowak, Eric and Phalippou, Ludovic, Private Equity Performance and Liquidity Risk (August 29, 2011). Journal of Finance, Forthcoming; Swiss Finance Institute Research Paper No. 09-43. Available at SSRN: https://ssrn.com/abstract=1517044 or http://dx.doi.org/10.2139/ssrn.1517044