The Cash Flow, Return and Risk Characteristics of Private Equity

NYU, Finance Working Paper No. 03-001

43 Pages Posted: 18 Mar 2003  

Alexander Ljungqvist

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 7 versions of this paper

Date Written: January 9, 2003

Abstract

Using a unique dataset of private equity funds over the last two decades, this paper analyzes the cash flow, return, and risk characteristics of private equity. Unlike previous studies, we have detailed cash flow data for each fund, rather than aggregate or accounting returns. We also know the exact timing of investments and capital returns to investors and the number and types of companies each fund invested in. We document the draw down and capital return schedules for the typical private equity fund, and show that it takes several years for capital to be invested, and over ten years for capital to be returned to generate excess returns. We provide several determining factors for these schedules, including existing investment opportunities and competition amongst private equity funds. In terms of performance, we document that private equity generates excess returns on the order of five to eight percent per annum relative to the aggregate public equity market. Moreover, while we estimate the betas of the private equity funds' portfolios to be greater than one, we show that on a risk-adjusted basis the excess value of the typical private equity fund is on the order of 24 percent relative to the present value of the invested capital. One interpretation of this magnitude is that it represents compensation for holding a 10-year illiquid investment.

Keywords: Venture capital, Private equity, Liquidity

JEL Classification: G24, G12

Suggested Citation

Ljungqvist, Alexander and Richardson, Matthew P., The Cash Flow, Return and Risk Characteristics of Private Equity (January 9, 2003). NYU, Finance Working Paper No. 03-001. Available at SSRN: https://ssrn.com/abstract=369600 or http://dx.doi.org/10.2139/ssrn.369600

Alexander Ljungqvist (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
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212-998-0304 (Phone)
212-995-4220 (Fax)

HOME PAGE: http://pages.stern.nyu.edu/~aljungqv

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR)

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London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

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B-1050 Brussels
Belgium

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Matthew P. Richardson

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0349 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

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United States

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