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

61 Pages Posted: 19 Apr 2021 Last revised: 25 May 2023

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)

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Date Written: April 2021

Abstract

Standard measures of private equity performance based on cash flows overlook discount rate risk. An index constructed from prices paid in secondary market transactions indicates that private equity 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 private equity 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.

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 2021). NBER Working Paper No. w28691, Available at SSRN: https://ssrn.com/abstract=3829389

Brian H. Boyer (Contact Author)

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

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

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Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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European Corporate Governance Institute (ECGI) ( email )

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Belgium

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