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Risk and Expected Returns of Private Equity Investments: Evidence Based on Market Prices

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Author Info
Narasimhan Jegadeesh
Roman Kräussl
Joshua Pollet

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Abstract

We estimate the risk and expected returns of private equity investments based on the market prices of exchange-traded funds of funds that invest in unlisted private equity funds. Our results indicate that the market expects unlisted private equity funds to earn abnormal returns of approximately 1% per year. We also find that the market expects listed private equity funds to earn zero or marginally negative abnormal returns net of fees. Both listed and unlisted private equity funds have market betas close to one and positive factor loadings on the Fama-French SMB factor. Private equity fund returns are positively related to GDP growth and negatively related to the credit spread. In addition, we find that market returns of exchange traded funds of funds and listed private equity funds predict changes in self-reported book values of unlisted private equity funds.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15335.

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Date of creation: Sep 2009
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Handle: RePEc:nbr:nberwo:15335

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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  1. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February. [Downloadable!] (restricted)
  2. Martin, John D. & Petty, J. William, 1983. "An Analysis of the Performance of Publicly Traded Venture Capital Companies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(03), pages 401-410, September. [Downloadable!]
  3. Fama, Eugene F, 1990. " Stock Returns, Expected Returns, and Real Activity," Journal of Finance, American Finance Association, vol. 45(4), pages 1089-1108, September. [Downloadable!] (restricted)
  4. Cochrane, John H., 2005. "The risk and return of venture capital," Journal of Financial Economics, Elsevier, vol. 75(1), pages 3-52, January. [Downloadable!] (restricted)
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  5. Alexander Ljungqvist & Matthew Richardson, 2003. "The cash flow, return and risk characteristics of private equity," NBER Working Papers 9454, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Steven N. Kaplan & Antoinette Schoar, 2005. "Private Equity Performance: Returns, Persistence, and Capital Flows," Journal of Finance, American Finance Association, vol. 60(4), pages 1791-1823, 08. [Downloadable!] (restricted)
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  7. Kaplan, Steven N. & Stein, Jeremy C., 1990. "How risky is the debt in highly leveraged transactions?," Journal of Financial Economics, Elsevier, vol. 27(1), pages 215-245, September. [Downloadable!] (restricted)
  8. Gompers, Paul & Lerner, Josh, 1999. "An analysis of compensation in the U.S. venture capital partnership1," Journal of Financial Economics, Elsevier, vol. 51(1), pages 3-44, January. [Downloadable!] (restricted)
  9. Koopman, Siem Jan & Kräussl, Roman & Lucas, André & Monteiro, André B., 2009. "Credit cycles and macro fundamentals," Journal of Empirical Finance, Elsevier, vol. 16(1), pages 42-54, January. [Downloadable!] (restricted)
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  10. Brophy, David J. & Guthner, Mark W., 1988. "Publicly traded venture capital funds: implications for institutional "fund of funds" investors," Journal of Business Venturing, Elsevier, vol. 3(3), pages 187-206. [Downloadable!] (restricted)
  11. Ludovic Phalippou & Oliver Gottschalg, 2009. "The Performance of Private Equity Funds," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 22(4), pages 1747-1776, April. [Downloadable!] (restricted)
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