A New Method to Estimate Risk and Return of Non-traded Assets from Cash Flows: The Case of Private Equity Funds

50 Pages Posted: 27 Feb 2007 Last revised: 13 Jan 2015

See all articles by Joost Driessen

Joost Driessen

Tilburg University - Tilburg University School of Economics and Management; Tilburg University - Center for Economic Research (CentER)

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Ludovic Phalippou

University of Oxford - Said Business School

Multiple version iconThere are 3 versions of this paper

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

Driessen, Joost and Lin, Tse-Chun and Phalippou, Ludovic, A New Method to Estimate Risk and Return of Non-traded Assets from Cash Flows: The Case of Private Equity Funds (February 14, 2011). 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, Available at SSRN: https://ssrn.com/abstract=965917

Joost Driessen (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Ludovic Phalippou

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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