Download this Paper Open PDF in Browser

Valuing Private Equity

64 Pages Posted: 9 Nov 2013 Last revised: 7 Oct 2014

Morten Sorensen

Copenhagen Business School; Columbia Business School; Centre for Economic Policy Research (CEPR)

Neng Wang

Columbia Business School - Finance and Economics

Jinqiang Yang

Shanghai University of Finance and Economics

Multiple version iconThere are 4 versions of this paper

Date Written: November 2013

Abstract

We investigate whether the performance of Private Equity (PE) investments is sufficient to compensate investors (LPs) for risk, long-term illiquidity, management and incentive fees charged by the general partner (GP). We analyze the LP's portfolio-choice problem and find that management fees, carried interest and illiquidity are costly, and GPs must generate substantial alpha to compensate LPs for bearing these costs. Debt is cheap and reduces these costs, potentially explaining the high leverage of buyout transactions. Conventional interpretations of PE performance measures appear optimistic. On average, LPs may just break even, net of management fees, carry, risk, and costs of illiquidity.

Suggested Citation

Sorensen, Morten and Wang, Neng and Yang, Jinqiang, Valuing Private Equity (November 2013). NBER Working Paper No. w19612. Available at SSRN: https://ssrn.com/abstract=2352129

Morten Sørensen (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Neng Wang

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Jinqiang Yang

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, Shanghai 200433
China

Paper statistics

Downloads
101
Rank
18,929
Abstract Views
1,901