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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

51 Pages Posted: 25 May 2012  

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: February 1, 2011

Abstract

We develop a new methodology to estimate abnormal performance and risk exposure of non-traded assets from cashflows. Our methodology extends the standard internal rate of return approach to a dynamic setting. The small-sample properties are validated using a simulation study. We apply the method to a sample of 958 private equity funds. For venture capital funds, we find a high market beta and underperformance before and after fees. For buyout funds, we find a relatively low market beta and no evidence for outperformance. We find that self-reported net asset values significantly overstate fund values for mature and inactive funds.

Keywords: Risk exposure, abnormal return, private equity

JEL Classification: C51, G12, G23

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 (February 1, 2011). Netspar Discussion Paper No. 02/2011-121. Available at SSRN: https://ssrn.com/abstract=2065940 or http://dx.doi.org/10.2139/ssrn.2065940

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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