The Alpha and Beta of Private Equity Investments
58 Pages Posted: 16 Jan 2015
Date Written: October 24, 2014
This paper introduces a novel methodology to estimate abnormal performance and systematic risk of private equity investments from observable cash flow data. The methodology is validated using detailed Monte-Carlo simulations and is applied to a unique and comprehensive sample of 10,798 (6,380 venture capital and 4,418 buyout) fully realized portfolio company investments by private equity funds. The results show that both venture capital and buyout investments have substantial loadings on the market factor and earn statistically significant positive abnormal returns before fees. The paper also provides the first comprehensive analysis of the differences in systematic risk and abnormal returns across time periods, exit routes, regions, industries, and across companies with different characteristics, such as their stage of development in the venture segment. The results help to develop a more nuanced view of the risk and return characteristics of private equity investments and have important implications for the valuation of private companies.
Keywords: private equity, venture capital, abnormal return, systematic risk
JEL Classification: C51, G12, G23, G24
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