Evaluating Private Equity Performance Using Stochastic Discount Factors

59 Pages Posted: 7 Jan 2020 Last revised: 19 Feb 2020

See all articles by Oleg Gredil

Oleg Gredil

Tulane University - A.B. Freeman School of Business

Morten Sorensen

Copenhagen Business School; Columbia Business School; Centre for Economic Policy Research (CEPR)

William Waller

Tulane University - Finance & Economics

Date Written: December 13, 2019

Abstract

We examine the performance of 2,790 private equity (PE) funds incepted during 1979-2008 using Stochastic Discount Factors (SDFs) implied by the two leading consumption-based asset pricing models (CBAPMs) — external habit and long-run risks — as their assumptions appear consistent with investment objectives of avid PE investors. In contrast to CAPM-based inference, venture funds did not destroy value under these CBAPMs in post-2000 vintages and may even have outperformed buyouts and generalists in the full sample. We find that 2007-08 venture vintages provide a better hedge for post-crises consumption shocks than other types of PE, and that the temporal variation in PE excess returns is significantly smaller under CBAPMs. Our contribution is also methodological. We extend the realized risk premia matching insight of Korteweg and Nagel (2016) to a more general class of SDFs, namely portfolio-specific discount factors that reflect non-tradeable assets unspanned by standard benchmarks. To this end, we propose a more efficient estimation of SDF parameters in this context and develop a finite sample bias correction for NPV-based inference with long-duration assets.

Keywords: Private Equity, Venture Capital, Institutional Investors, Consumption-based Asset Pricing, University endowments, Pension plans

JEL Classification: C11, G12, G14, G23, G24, G32, G34

Suggested Citation

Gredil, Oleg and Sørensen, Morten and Waller, William, Evaluating Private Equity Performance Using Stochastic Discount Factors (December 13, 2019). Available at SSRN: https://ssrn.com/abstract=3506847 or http://dx.doi.org/10.2139/ssrn.3506847

Oleg Gredil (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Morten Sørensen

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

William Waller

Tulane University - Finance & Economics ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States

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