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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

Joost Driessen

Tilburg University - Department of Finance; CentER Tilburg University

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Ludovic Phalippou

University of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance

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 - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

CentER Tilburg University ( 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

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

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