The Private Equity Discount: An Empirical Examination of the Exit of Venture Backed Companies

Abstract

Little is known about the risk and return characteristics of private equity investments. In this paper we examine 52,322 financing rounds in 23,208 unique firms, over the period 1980 through 2000 by venture and buyouts funds and estimate the probability of exit, the exit multiples and the expected gains from private equity investments. We find that the gains from venture-backed investments depend upon the industry, the stage of the firm being financed, the financing amount, the valuation at the time of financing, and the prevailing market sentiment. The expected multiple ranges from a low of 1.12 for late-stage firms to a high of 5.12 for firms financed in their early stages. Our study is the first step in understanding the risk premium required for the valuation of private equity investments. It will be of particular interest to the VC community and valuation practitioners.

Keywords: Private Equity Discount

JEL Classification: G12, G24