What Really Drives Risk Premium and Abnormal Returns in Private Equity Funds? A New Perspective

The Journal Of Private Equity, Fall 2013

https://doi.org/10.3905/jpe.2013.16.4.008

Posted: 21 May 2019

See all articles by Fernando Scarpati

Fernando Scarpati

University of Roehampton - Social Sciences

Wilson Ng

IDRAC Business School, Campus de Lyon

Date Written: May 7, 2013

Abstract

In the last two decades, a number of private equity scholars have attempted to assess the ex-post returns (performance) of private equity funds (PEs). Such studies have produced both contradictory conclusions that have included a wide spread of abnormal realized returns ranging from -6% (Phalippou & Gottschalg, [2009]) to 32% (Cochrane, [2005]). Moreover, this research has been concerned with assessing realized returns instead of the required risk-premium. In addition, research in the last two decades has found a set of phenomena unique to the PE sector that influence performance and recent research suggests that illiquidity is the only additional factor to include in asset pricing models. This article seeks to help practitioners understand the drivers and determinants of risk-premium in PE investments and expected abnormal returns by critiquing extant research and explaining why contradictions persist in its results. We then propose a model which will allow practitioners to identify the nature of the drivers involved in PE investments thus enabling them to adopt a more rational approach in defining portfolios and assessing deals.

Keywords: Private equity funds, Risk premium and abnormal returns, Private equity drivers, Jensen's Alpha

JEL Classification: O16

Suggested Citation

Scarpati, Fernando and Ng, Wilson, What Really Drives Risk Premium and Abnormal Returns in Private Equity Funds? A New Perspective (May 7, 2013). The Journal Of Private Equity, Fall 2013, https://doi.org/10.3905/jpe.2013.16.4.008, Available at SSRN: https://ssrn.com/abstract=2310096 or http://dx.doi.org/10.2139/ssrn.2310096

Fernando Scarpati (Contact Author)

University of Roehampton - Social Sciences ( email )

United Kingdom

Wilson Ng

IDRAC Business School, Campus de Lyon ( email )

47, Rue du Sergent Michel Berthet
Lyon, 69009
France
+447557098046 (Phone)
+6042292437 (Fax)

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