How Fair are the Valuations of Private Equity Funds?

28 Pages Posted: 7 Mar 2013

See all articles by Tim Jenkinson

Tim Jenkinson

University of Oxford - Said Business School; European Corporate Governance Institute (ECGI)

Miguel Sousa

School of Economics and Management, University of Porto

Rüdiger Stucke

Warburg Pincus; University of Oxford

Date Written: February 27, 2013


The ultimate performance of private equity funds is only known once all investments have been sold, and the cash returned to investors. This typically takes over a decade. In the meantime, the reported performance depends on the valuation of the remaining portfolio companies. Private equity houses market their next fund on the basis of these interim valuations of their current fund. In this paper we analyze whether these valuations are fair, whether the extent of conservative or aggressive valuations differ during the life of the fund, and at what stage interim performance measures predict ultimate performance. This paper is the first to use the quarterly valuations and cash flows for the entire history of 761 fund investments made by Calpers – the largest U.S. investor in private equity. Our main findings are as follows. First, over the entire life of the fund we find evidence that fund valuations are conservative, and tend to be smoothed (relative to movements in public markets): valuations understate subsequent distributions by around 35% on average. We find a significant jump in valuations in the fourth-quarter, when funds are normally audited. Second, the exception to this general conservatism is the period when follow-on funds are being raised. We find that valuations, and reported returns, are inflated during fundraising, with a gradual reversal once the follow-on fund has been closed. Third, we find that the performance figures reported by funds during fund-raising have little power to predict ultimate returns. This is especially true when performance is measured by IRR. Using public market equivalent measures increases predictability significantly. Our results show that investors should be extremely wary of basing investment decisions on the returns - especially IRRs – of the current fund.

Keywords: private equity, fund valuation, fund returns

JEL Classification: G24, G32, G34

Suggested Citation

Jenkinson, Tim and Sousa, Miguel and Stucke, Rüdiger, How Fair are the Valuations of Private Equity Funds? (February 27, 2013). Available at SSRN: or

Tim Jenkinson (Contact Author)

University of Oxford - Said Business School ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Miguel Sousa

School of Economics and Management, University of Porto ( email )

Rua Roberto Frias
Porto, 4200-464

Rüdiger Stucke

Warburg Pincus ( email )

450 Lexington Ave
New York, NY 10017
United States

University of Oxford ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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