Download This PaperDiscount-Rate Risk in Private Equity: Evidence from Secondary Market Transactions
71 Pages Posted: 16 Jun 2022 Last revised: 2 Feb 2023
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Discount-Rate Risk in Private Equity: Evidence from Secondary Market Transactions
Discount Rate Risk in Private Equity: Evidence from Secondary Market Transactions
Discount Rate Risk in Private Equity: Evidence from Secondary Market Transactions
Date Written: December 23, 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: Suggested Citation
Michael S. Weisbach
Ohio State University (OSU) - Department of Finance ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States