Risk-Adjusting the Returns to Venture Capital

49 Pages Posted: 14 Aug 2013 Last revised: 17 Jun 2015

See all articles by Arthur G. Korteweg

Arthur G. Korteweg

University of Southern California - Marshall School of Business

Stefan Nagel

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: June 16, 2015

Abstract

We adapt stochastic discount factor (SDF) valuation methods for venture capital (VC) performance evaluation. Our approach generalizes the popular Public Market Equivalent (PME) method and it allows statistical inference in the presence of cross-sectionally dependent, skewed VC payoffs. We relax SDF restrictions implicit in the PME so that the SDF can accurately reflect risk-free rates and returns of public equity markets during the sample period. This generalized PME yields substantially different abnormal performance estimates for VC funds and start-up investments, especially in times of strongly rising public equity markets and for investments with betas far from one.

Keywords: venture capital, private equity, risk-adjusted returns, performance measurement, stochastic discount factor, CAPM, PME, GMM

JEL Classification: G12, G24

Suggested Citation

Korteweg, Arthur G. and Nagel, Stefan, Risk-Adjusting the Returns to Venture Capital (June 16, 2015). Journal of Finance, Forthcoming, Rock Center for Corporate Governance at Stanford University Working Paper No. 180, Stanford University Graduate School of Business Research Paper No. 14-10, Available at SSRN: https://ssrn.com/abstract=2309596 or http://dx.doi.org/10.2139/ssrn.2309596

Arthur G. Korteweg (Contact Author)

University of Southern California - Marshall School of Business ( email )

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HOME PAGE: http://www-bcf.usc.edu/~korteweg/

Stefan Nagel

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Centre for Economic Policy Research ( email )

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Munich, DE-81679
Germany

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