A New Method to Estimate Risk and Return of Nontraded Assets from Cash Flows: The Case of Private Equity Funds
AbstractWe develop a new GMM-style methodology with good small-sample properties to assess the abnormal performance and risk exposure of a non-traded asset from a cross-section of cash flow data. We apply this method to a sample of 958 mature private equity funds spanning 24 years. Our methodology uses actual cash flow data and not intermediary self-reported Net Asset Values. In addition, it does not require a distributional assumption for returns. For venture capital funds, we find a high market beta and significant under-performance. For buyout funds, we find a low beta and no abnormal performance, but the sample is small. Larger funds have higher returns due to higher risk exposures and not higher alphas. We also find that Net Asset Values significantly overstate fund market values for the subset of mature and inactive funds.
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Bibliographic InfoArticle provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.
Volume (Year): 47 (2012)
Issue (Month): 03 (June)
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Other versions of this item:
- Joost Driessen & Tse-Chun Lin & Ludovic Phalippou, 2008. "A New Method to Estimate Risk and Return of Non-Traded Assets from Cash Flows: The Case of Private Equity Funds," NBER Working Papers 14144, National Bureau of Economic Research, Inc.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
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