Modeling Private Equity: A Machine-Learning Approach

65 Pages Posted: 6 May 2019 Last revised: 25 Aug 2020

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: August 24, 2020

Abstract

We introduce an estimator that measures time-varying factor exposures of individual private equity funds, with minimal assumptions about the fund return DGP. Simulations using varying assumptions about the autoregressive and moving-average properties of the DGP show that our estimator exhibits less bias and variance (thus, lower MSE) than competing estimators. Applying our model to a newly available commercial dataset,
PitchBook, we undercover new findings of economic importance: buyout managers have higher average skill levels than claimed by past studies; portfolios are marked with forward looking and lagged multiples of factors; and skill and systematic exposures vary significantly over time.

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

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 (August 24, 2020). 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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