The Liquidity Cost of Private Equity Investments: Evidence from Secondary Market Transactions

Fisher College of Business Working Paper No. 2016-03-011

Charles A. Dice Center Working Paper No. 2016-11

52 Pages Posted: 2 Jul 2016 Last revised: 26 Aug 2017

See all articles by Taylor Nadauld

Taylor Nadauld

Brigham Young University

Berk A. Sensoy

Vanderbilt University - Finance

Keith Vorkink

Brigham Young University - J. Willard and Alice S. Marriott School of Management

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: August 24, 2017

Abstract

This paper uses proprietary data from a leading intermediary to understand the magnitude and determinants of transaction costs in the secondary market for private equity stakes. Most transactions occur at a discount to net asset value. Buyers average an annualized public market equivalent of 1.023 compared to 0.976 for sellers, implying that buyers outperform sellers by a market-adjusted five percentage points annually. Both the cross-sectional pattern of transaction costs and the identity of sellers and buyers suggest that the market can be characterized as one in which relatively flexible buyers earn returns by supplying liquidity to investors wishing to exit.

Keywords: Private Equity, Secondary Market for Private Equity Funds, Liquidity, Transactions Costs

JEL Classification: G11, G23, G24

Suggested Citation

Nadauld, Taylor and Sensoy, Berk A. and Vorkink, Keith and Weisbach, Michael S., The Liquidity Cost of Private Equity Investments: Evidence from Secondary Market Transactions (August 24, 2017). Fisher College of Business Working Paper No. 2016-03-011; Charles A. Dice Center Working Paper No. 2016-11. Available at SSRN: https://ssrn.com/abstract=2802625 or http://dx.doi.org/10.2139/ssrn.2802625

Taylor Nadauld

Brigham Young University ( email )

Provo, UT 84602
United States

Berk A. Sensoy

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Keith Vorkink

Brigham Young University - J. Willard and Alice S. Marriott School of Management ( email )

Provo, UT 84602
United States

Michael S. Weisbach (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

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

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