Nowcasting Net Asset Values: The Case of Private Equity

59 Pages Posted: 14 Jan 2020 Last revised: 19 Mar 2021

See all articles by Gregory W. Brown

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area

Eric Ghysels

University of North Carolina Kenan-Flagler Business School; University of North Carolina (UNC) at Chapel Hill - Department of Economics

Oleg Gredil

Tulane University - A.B. Freeman School of Business

Date Written: April 16, 2020

Abstract

We apply advances in analysis of mixed frequency and sparse data methods to estimate ``unsmoothed'' private equity (PE) Net Asset Values (NAVs) at the weekly frequency for individual funds. Using simulations and a large sample of buyout and venture funds, we show that our method yields superior estimates of NAVs relative to a simple approach based on comparable public asset and as-reported NAVs. The market beta of an average buyout [venture] fund, around 1.05 [1.20], is notably lower than previous studies suggest. The overall risk of a median buyout [venture] fund is 34% [40%] per year if measured in terms of the standard deviation of total returns, an increase of 10 [13] percentage points relative to the series based on as-reported NAVs. However, we find significant variation in systematic and idiosyncratic risk within and across vintages, and the risk-return profile based on the samples from the 1990s is not representative of currently operating funds. Our method easily accommodates additional data, such as individual holdings details, and related M&A activity. As an example application, we show how the cross-section of appraisal biases and nowcast errors evolved around the 2008 Financial crisis.

Keywords: Private Equity, Venture Capital, Leveraged Buyouts, Institutional Investors, State Space Models, Machine Learning

JEL Classification: G23, G24, G30

Suggested Citation

Brown, Gregory W. and Ghysels, Eric and Gredil, Oleg, Nowcasting Net Asset Values: The Case of Private Equity (April 16, 2020). Kenan Institute of Private Enterprise Research Paper No. 20-02, Available at SSRN: https://ssrn.com/abstract=3507873 or http://dx.doi.org/10.2139/ssrn.3507873

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Eric Ghysels

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Gardner Hall, CB 3305
Chapel Hill, NC 27599
United States
919-966-5325 (Phone)
919-966-4986 (Fax)

HOME PAGE: http://https://eghysels.web.unc.edu/

Oleg Gredil (Contact Author)

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

7 McAlister Drive
New Orleans, LA 70118
United States

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