Credit Market Equivalents and the Valuation of Private Firms

Posted: 16 Oct 2019

See all articles by Niklas Hüther (Huether)

Niklas Hüther (Huether)

Indiana University - Kelley School of Business

Lukas Schmid

University of Southern California - Marshall School of Business

Roberto Steri

University of Luxembourg

Date Written: October 2, 2019

Abstract

We propose to value private equity investments by credit market equivalents (CME). Our method relies on the observation that many portfolio companies held by private equity funds have loans and bonds traded in secondary markets. We exploit the market valuations embedded in these prices by constructing a stochastic discount factor that prices loan and bond returns of private equity portfolio company portfolios. To that end, we construct a dataset that carefully matches loan and bond price data with a proprietary data on cash flows of private equity companies at the portfolio company level. With our credit market implied stochastic discount factor, we can value the cash flows of the private equity companies to derive their CME valuation. Using machine learning variable selection techniques, we identify a five-factor model for credit market returns. Our method works as long as credit and private equity markets are sufficiently integrated, for which we provide supportive empirical evidence.

Keywords: private equity, stochastic discount factor, loan and corporate bond returns, secondary market trading, machine learning, portfolio company level PE data

Suggested Citation

Hüther, Niklas and Schmid, Lukas and Steri, Roberto, Credit Market Equivalents and the Valuation of Private Firms (October 2, 2019). Available at SSRN: https://ssrn.com/abstract=3463333

Niklas Hüther

Indiana University - Kelley School of Business ( email )

1275 E 10th St
Bloomington, IN 47405
United States

Lukas Schmid

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

Roberto Steri (Contact Author)

University of Luxembourg ( email )

Kirchberg, 6, rue Richard Coudenhove-Kalergi
Luxembourg
Luxembourg

HOME PAGE: http://https://sites.google.com/site/robertosteripersonalpage/

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