Features and Determinants of Risk in Investment Choices by Private Equity Funds

28 Pages Posted: 28 Jul 2016 Last revised: 17 Oct 2017

See all articles by Leonella Gori

Leonella Gori

Università Bocconi

Barbara Chizzolini

Bocconi University - Department of Economics

Stefano Gatti

Bocconi University - Department of Finance

Date Written: October 2017

Abstract

In this paper, we propose a measure of riskiness of PE assets alternative to the CAPM derived beta coefficient usually suggested in the literature on performance of PE Funds. We assume that at any given point in time there exist alternative investment opportunities that may be classified into a limited number of types, and that Funds look at the risk/return profile of each of the available investment types when taking their investment decisions. We first estimate a discrete choice model of the Fund Managers’ investment decisions by type of PE investment, as a function of the observed characteristics of the Fund, of the Deal and of the Portfolio Company, as well as of the expected returns and expected loss of the PE deals. Given the chosen type of investment, we then estimate the probability of negative returns of each deal in each investment class. These predicted probabilities together with the historical expected shortfalls by investment type, yield the Expected Loss by deal, the measure of pure risk we propose in this paper. We find that it is possible to identify the idiosyncratic features of each investment type and that the patterns and degrees of riskiness differ quite significantly among them.

Suggested Citation

Gori, Leonella and Chizzolini, Barbara and Gatti, Stefano, Features and Determinants of Risk in Investment Choices by Private Equity Funds (October 2017). BAFFI CAREFIN Centre Research Paper No. 2016-25. Available at SSRN: https://ssrn.com/abstract=2815338 or http://dx.doi.org/10.2139/ssrn.2815338

Leonella Gori

Università Bocconi ( email )

Barbara Chizzolini (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Stefano Gatti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

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