Private Equity Net Asset Values and Future Cash Flows

39 Pages Posted: 29 Jul 2015 Last revised: 21 Aug 2016

See all articles by Tim Jenkinson

Tim Jenkinson

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

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Brian Rountree

Rice University - Jesse H. Jones Graduate School of Business

Kazbi Soonawalla

University of Oxford - Said Business School

Date Written: August 20, 2016

Abstract

This paper analyzes whether fund valuations produced by private equity managers are biased predictors of future discounted cash flows (DCF). Our research is based on an extensive set of timed cash flows and reported net asset values (NAVs) that relates to 645 funds spanning 1988-2014. Using an ex ante lens, we find that, on average, reported NAVs converge on the future DCF early in the life of the fund. This result is particularly interesting to investors for whom unbiased asset valuations are important in keeping portfolios optimally allocated. In addition, findings indicate that although NAVs generally are more conservative in the first half of the sample period, NAVs for venture capital funds tend to overstate economic value after 1999. Findings from additional tests suggest that the overstatement is attributable to the effects of the financial crisis, and that VC fund managers fail to update NAV estimates in post-crisis years to reflect the effects of the crisis on future cash flows.

Keywords: Private equity, asset valuation, fair value

JEL Classification: G00, G24, G30, M40

Suggested Citation

Jenkinson, Tim and Landsman, Wayne R. and Rountree, Brian Robert and Soonawalla, Kazbi, Private Equity Net Asset Values and Future Cash Flows (August 20, 2016). Available at SSRN: https://ssrn.com/abstract=2636985 or http://dx.doi.org/10.2139/ssrn.2636985

Tim Jenkinson

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
United Kingdom
+44 1865 288916 (Phone)
+44 1865 288831 (Fax)

HOME PAGE: http://www.sbs.oxford.edu/timjenkinson

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Wayne R. Landsman (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Brian Robert Rountree

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Kazbi Soonawalla

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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