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Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting

51 Pages Posted: 25 Jan 2016 Last revised: 8 Sep 2017

Erik Stafford

Harvard Business School - Finance Unit

Date Written: May 20, 2017

Abstract

Private equity funds tend to select small firms with low EBITDA multiples. Public equities with these characteristics have high risk-adjusted returns after controlling for common factors. Hold-to-maturity accounting of portfolio net asset value eliminates the majority of measured risk. A passive portfolio of small, low EBITDA multiple stocks with modest leverage and hold-to-maturity accounting produces an unconditional return distribution that is highly consistent with that of the pre-fee aggregate private equity index. The passive replicating strategy represents an economically large improvement in risk- and liquidity-adjusted returns over direct allocations to private equity funds, which charge estimated fees of 3.5% to 5% annually.

Keywords: Private Equity; Value Investing; Endowments; Investment Management; Asset Pricing

JEL Classification: G11,G23

Suggested Citation

Stafford, Erik, Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting (May 20, 2017). Available at SSRN: https://ssrn.com/abstract=2720479 or http://dx.doi.org/10.2139/ssrn.2720479

Erik Stafford (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-8064 (Phone)
617-496-7357 (Fax)

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