50 Pages Posted: 27 Feb 2007 Last revised: 13 Jan 2015
Date Written: February 14, 2011
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
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