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Private Equity Performance and Liquidity Risk

65 Pages Posted: 5 Aug 2010 Last revised: 13 Sep 2012

Francesco A. Franzoni

USI Lugano; Swiss Finance Institute

Eric Nowak

University of Lugano; Swiss Finance Institute

Ludovic Phalippou

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

Multiple version iconThere are 2 versions of this paper

Date Written: May 12, 2011

Abstract

Private equity has traditionally been thought to provide diversification benefits
However, these benefits may be lower than anticipated. We find that private equity suffers from significant 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.

Netspar Discussion Paper No. 06/2010-024 (revised version May 2011)

Keywords: private equity, liquidity risk, cost of capital

JEL Classification: C51, G12, G23

Suggested Citation

Franzoni, Francesco A. and Nowak, Eric and Phalippou, Ludovic, Private Equity Performance and Liquidity Risk (May 12, 2011). Netspar Discussion Paper No. 06/2010-024; Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1653275 or http://dx.doi.org/10.2139/ssrn.1653275

Francesco A. Franzoni

USI Lugano ( email )

Via G. Buffi 13
Lugano, 6904
Switzerland

Swiss Finance Institute

Switzerland

Eric Nowak (Contact Author)

University of Lugano ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland
+41-91-9124-637 (secr. -712) (Phone)
+41-91-9124-647 (Fax)

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

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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