Download This PaperA New Method to Estimate Risk and Return of Non-traded Assets from Cash Flows: The Case of Private Equity Funds
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
EFA 2007 Ljubljana Meetings Paper
AFA 2008 New Orleans Meetings Paper
Swedish Institute for Financial Research Conference on The Economics of the Private Equity Market
50 Pages Posted: 27 Feb 2007 Last revised: 2 Apr 2011
There are 3 versions of this paper
A New Method to Estimate Risk and Return of Non-traded Assets from Cash Flows: The Case of Private Equity Funds
A New Method to Estimate Risk and Return of Non-Traded Assets from Cash Flows: The Case of Private Equity Funds
A New Method to Estimate Risk and Return of Non-Traded Assets from Cash Flows: The Case of Private Equity Funds
Date Written: February 14, 2011
Abstract
We develop a new methodology to estimate abnormal performance and risk exposure of non-traded assets from cash flows. Our methodology extends the standard internal rate of return approach to a dynamic setting. The small-sample properties are validated using a simulation study. We apply the method to a sample of 958 private equity funds. For venture capital funds, we find a high market beta and underperformance before and after fees. For buyout funds, we find a relatively low market beta and no evidence for outperformance. We find that self-reported net asset values significantly overstate fund values for mature and inactive funds.
Keywords: Risk exposure, Abnormal return, Private equity
JEL Classification: C51, G12, G23
Suggested Citation: Suggested Citation
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