Modeling Private Equity: A Machine-Learning Approach

66 Pages Posted: 6 May 2019 Last revised: 4 Nov 2019

See all articles by Apollon Fragkiskos

Apollon Fragkiskos

Barings

Olga Krasotkina

Markov Processes International LLC

Harold D. Spilker III

University Of Hawaii At Manoa, Shidler College of Business

Russ Wermers

University of Maryland - Robert H. Smith School of Business; European Corporate Governance Institute (ECGI)

Date Written: November 1, 2019

Abstract

We introduce a flexible time-series estimator to measure factor exposures of individual private equity funds; our model estimates individual fund factor exposures with minimal assumptions about the underlying return process. Under varying autoregressive and moving-average simulations, we estimate systematic exposures with less bias and variance (thus, lower MSE) than competing estimators. We apply our model to a newly available commercial dataset, PitchBook, and find alphas that are higher than those reported in the recent literature. The large dispersion, across individual funds, of our estimated alpha and beta coefficients highlight the benefits of fund-specific analysis, compared to past cross-sectional estimation approaches.

Keywords: Private Equity, Buyout Funds, Time-Series, Supervised Machine Learning, Jackknife, Cross-Validation, Factor Modeling, Long Horizons, Overlapping

JEL Classification: C01, C22, G12, G17

Suggested Citation

Fragkiskos, Apollon and Krasotkina, Olga and Spilker III, Harold D. and Wermers, Russell R., Modeling Private Equity: A Machine-Learning Approach (November 1, 2019). Available at SSRN: https://ssrn.com/abstract=3367079 or http://dx.doi.org/10.2139/ssrn.3367079

Apollon Fragkiskos (Contact Author)

Barings ( email )

300 South Tryon Street
Charlotte, NC 28202
United States
28202 (Fax)

HOME PAGE: http://https://www.barings.com/us/institutional

Olga Krasotkina

Markov Processes International LLC ( email )

25 Maple Street
Summit, NJ 07901
United States

Harold D. Spilker III

University Of Hawaii At Manoa, Shidler College of Business ( email )

2404 Maile Way
Honolulu, HI 96822
United States
8089568738 (Phone)

Russell R. Wermers

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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