Cyclicality, Performance Measurement, and Cash Flow Liquidity in Private Equity

52 Pages Posted: 21 Sep 2011 Last revised: 28 Oct 2014

See all articles by David T. Robinson

David T. Robinson

Fuqua School of Business, Duke University; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Berk A. Sensoy

Vanderbilt University - Finance

Multiple version iconThere are 2 versions of this paper

Date Written: September 2011

Abstract

Public and private equity waves move together. Using quarterly cash-flow data for a large sample of venture capital and buyout funds from 1984-2010, we investigate the implications of this co-cyclicality for understanding private equity cash flows and performance. In the cross-section, varying the beta used to assess relative performance has a large effect on inference near a beta of zero, but only a modest effect for more reasonable beta estimates. A similar message comes through in the time series. Though funds raised in hot markets underperform in absolute terms, this underperformance is sharply reduced by a comparison to the S&P 500, and disappears entirely at the levels of beta recently estimated in the literature. These findings imply that high private equity fundraising forecasts both low private equity cash flows and low market returns, suggesting a positive correlation between private equity net cash flows and public equity valuations. Examining cash flows directly, we find that this is indeed the case. While both capital calls and distributions rise with public equity valuations, distributions are more sensitive than calls. Net cash flows are therefore procyclical and private equity funds are liquidity providers (sinks) when market valuations are high (low). Venture cash flows and performance are considerably more procyclical than buyout. Debt market conditions also have a significant impact on private equity cash flows. At the same time, most cash-flow variation is idiosyncratic across funds, and most predictable variation is explained by the age of the fund.

Suggested Citation

Robinson, David T. and Sensoy, Berk A., Cyclicality, Performance Measurement, and Cash Flow Liquidity in Private Equity (September 2011). NBER Working Paper No. w17428, Available at SSRN: https://ssrn.com/abstract=1931200

David T. Robinson (Contact Author)

Fuqua School of Business, Duke University ( email )

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National Bureau of Economic Research (NBER)

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Berk A. Sensoy

Vanderbilt University - Finance ( email )

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