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

75 Pages Posted: 16 Jun 2022

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: June 10, 2022

Abstract

Measures of private equity performance based on cash flows do not account for a discount-rate risk premium that is a component of CAPM alpha. We create secondary market PE indices and find that PE discount rates vary considerably. NAVs are too smooth because they fail to reflect variation in market discount rates. While the CAPM alpha for our index is zero, the GPME based on cash flows is large and positive. We obtain similar results for a set 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 (June 10, 2022). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4133946

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 )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

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1000 Brussels
Belgium

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