Discount Rate Risk in Private Equity: Evidence from Secondary Market Transactions

Fisher College of Business Working Paper No. 2021-03-004

Charles A. Dice Center Working Paper No. 2021-04

61 Pages Posted: 12 Apr 2021

See all articles by Brian H. Boyer

Brian H. Boyer

Brigham Young University - J. Willard and Alice S. Marriott School of Management

Taylor Nadauld

Brigham Young University

Keith Vorkink

Brigham Young University - J. Willard and Alice S. Marriott School of Management

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: April 8, 2021

Abstract

Standard measures of PE performance based on cash flows overlook discount rate risk. An index constructed from prices paid in secondary market transactions indicates that PE discount rates vary considerably. While the standard alpha for our index is zero, measures of performance based on cash flow data for funds in our index are large and positive. To illustrate that results are not driven by idiosyncrasies of PE secondary markets, we obtain similar results using cash flows and returns of synthetic funds that invest in small cap stocks. Ignoring variation in PE discount rates can lead to a misallocation of capital.

Keywords: Private Equity, Secondary Market for Private Equity Funds, Market Index

JEL Classification: G11, G23, G24

Suggested Citation

Boyer, Brian H. and Nadauld, Taylor and Vorkink, Keith and Weisbach, Michael S., Discount Rate Risk in Private Equity: Evidence from Secondary Market Transactions (April 8, 2021). Fisher College of Business Working Paper No. 2021-03-004, Charles A. Dice Center Working Paper No. 2021-04, Available at SSRN: https://ssrn.com/abstract=3823332 or http://dx.doi.org/10.2139/ssrn.3823332

Brian H. Boyer

Brigham Young University - J. Willard and Alice S. Marriott School of Management ( email )

Provo, UT 84602
United States

Taylor Nadauld

Brigham Young University ( email )

Keith Vorkink

Brigham Young University - J. Willard and Alice S. Marriott School of Management ( email )

Provo, UT 84602
United States

Michael S. Weisbach (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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