Risk Adjustment in Private Equity Returns
34 Pages Posted: 19 Dec 2018 Last revised: 18 Sep 2019
Date Written: November 16, 2018
This article reviews empirical methods to assess risk and return in private equity. I discuss data and econometric issues for deal-level, fund-level, and publicly traded partnerships data. Risk-adjusted return estimates vary substantially by method, time period, and data source. The weight of evidence suggests that relative to a similarly risky investment in the stock market, the average venture capital (VC) fund earned positive risk-adjusted returns before the turn of the millennium, but net-of-fee returns have been zero or even negative since. Average leveraged buyout (BO) investments have generally earned positive risk-adjusted returns both before and after fees, relative to a levered stock portfolio. I also consider additional risk factors proposed in the literature. VC looks like a small-growth investment, while BO loads mostly on value. Liquidity and idiosyncratic risks are also discussed.
Keywords: private equity, venture capital, risk, return
JEL Classification: C58, G12, G23, G24
Suggested Citation: Suggested Citation