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

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  • Narasimhan Jegadeesh
  • Roman Kräussl
  • Joshua Pollet

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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  1. Gompers, Paul & Lerner, Josh, 2000. "Money chasing deals? The impact of fund inflows on private equity valuation," Journal of Financial Economics, Elsevier, Elsevier, vol. 55(2), pages 281-325, February.
  2. Ludovic Phalippou & Oliver Gottschalg, 2009. "The Performance of Private Equity Funds," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(4), pages 1747-1776, April.
  3. Cochrane, John, 2000. "The Risk and Return of Venture Capital," University of California at Los Angeles, Anderson Graduate School of Management, Anderson Graduate School of Management, UCLA qt7qm9h594, Anderson Graduate School of Management, UCLA.
  4. Gompers, Paul & Lerner, Josh, 1999. "An analysis of compensation in the U.S. venture capital partnership," Journal of Financial Economics, Elsevier, Elsevier, vol. 51(1), pages 3-44, January.
  5. Koopman, Siem Jan & Kräussl, Roman & Lucas, André & Monteiro, André B., 2009. "Credit cycles and macro fundamentals," Journal of Empirical Finance, Elsevier, Elsevier, vol. 16(1), pages 42-54, January.
  6. Kaplan, Steve & Schoar, Antoinette, 2004. "Private Equity Performance: Returns, Persistence and Capital Flows," Working papers 4446-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. Stéphanie Bilo & Hans Christophers & Michèl Degosciu & Heinz Zimmermann, 2005. "Risk, returns, and biases of listed private equity portfolios," Working papers, Faculty of Business and Economics - University of Basel 2005/01, Faculty of Business and Economics - University of Basel.
  8. Quigley, John M. & Woodward, Susan E., 2003. "An Index for Venture Capital," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt15g2h7g9, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  9. Kaplan, Steven N. & Stein, Jeremy C., 1990. "How risky is the debt in highly leveraged transactions?," Journal of Financial Economics, Elsevier, Elsevier, vol. 27(1), pages 215-245, September.
  10. Fama, Eugene F, 1990. " Stock Returns, Expected Returns, and Real Activity," Journal of Finance, American Finance Association, American Finance Association, vol. 45(4), pages 1089-1108, September.
  11. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(1), pages 3-56, February.
  12. 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.
  13. 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.
  14. 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, Cambridge University Press, vol. 18(03), pages 401-410, September.
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Cited by:
  1. Da Rin, M. & Hellmann, T. & Puri, M.L., 2011. "A Survey of Venture Capital Research," Discussion Paper, Tilburg University, Center for Economic Research 2011-111, Tilburg University, Center for Economic Research.
  2. Robert S. Harris & Tim Jenkinson & Steven N. Kaplan, 2012. "Private Equity Performance: What Do We Know?," NBER Working Papers 17874, National Bureau of Economic Research, Inc.
  3. Morten Sorensen & Neng Wang & Jinqiang Yang, 2013. "Valuing Private Equity," NBER Working Papers 19612, National Bureau of Economic Research, Inc.

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