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

43 Pages Posted: 11 Jul 2016

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: July 2016

Abstract

An important cost of investing in private equity is the illiquidity of these investments. In response to this illiquidity, a secondary market for transacting stakes in private equity funds has developed. This paper uses proprietary data from a leading intermediary to understand the magnitude and determinants of transaction costs in this market. Most transactions occur at a discount to net asset value. Buyers average an annualized Public Market Equivalent (PME) of 1.023 compared to 0.974 for sellers, implying that buyers outperform sellers by a market-adjusted five percentage points annually. For the most common type of transaction, the sale of stakes in funds four to nine years old, the difference is smaller, about three percentage points. Both the discount to NAV and the difference in returns between buyers and sellers returns appear to be related to factors associated with asymmetric information and market depth. Buyers in this market tend to be funds-of-funds, while sellers are more likely to be traditional private equity investors such as endowments and pension funds.

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 (July 2016). NBER Working Paper No. w22404. Available at SSRN: https://ssrn.com/abstract=2807734

Taylor Nadauld (Contact Author)

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

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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