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Private Equity: Strategies for Improving Performance

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Abstract

Existing research suggests the average private equity* manager does not create excess returns over public markets net of fees. We confirm this result using a factor model that allows for leverage, illiquidity and volatility clustering. The model explains 70 to 90 per cent of the variation in returns. Our model also gives rise to two methods of improving conventional private equity performance via a synthetic exposure. We test the robustness of the synthetic methods using historical and simulated data.

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Bibliographic Info

Paper provided by The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney in its series Working Paper Series with number 12.

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Length: 44 pages
Date of creation: 01 Sep 2011
Date of revision:
Handle: RePEc:uts:pwcwps:12

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Keywords: buyouts; venture capital; conditional overlay; GARCH;

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  1. Tobias J. Moskowitz & Annette Vissing-Jorgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," NBER Working Papers 8876, National Bureau of Economic Research, Inc.
  2. Luboš Pástor & Robert F. Stambaugh, . "Liquidity Risk and Expected Stock Returns," CRSP working papers 531, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  3. Josh Lerner & Antoinette Schoar & Wan Wong, 2005. "Smart Institutions, Foolish Choices? The Limited Partner Performance Puzzle," NBER Working Papers 11136, National Bureau of Economic Research, Inc.
  4. Mila Getmansky & Andrew W. Lo & Igor Makarov, 2003. "An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns," NBER Working Papers 9571, National Bureau of Economic Research, Inc.
  5. Robert M. Conroy & Robert S. Harris, 2007. "How Good are Private Equity Returns?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(3), pages 96-108.
  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.
  7. Ron Bird & Harry Liem & Susan Thorp, 2010. "Hedge Fund Excess Returns Under Time-Varying Beta," Working Paper Series 9, The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney.
  8. Oliver, Gottschalg & Ludovic, Phalippou, 2006. "The performance of private equity funds," Les Cahiers de Recherche 852, HEC Paris.
  9. 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.
  10. Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September.
  11. Ferson, Wayne E & Schadt, Rudi W, 1996. " Measuring Fund Strategy and Performance in Changing Economic Conditions," Journal of Finance, American Finance Association, vol. 51(2), pages 425-61, June.
  12. Jonathan B. Berk & Richard C. Green, 2002. "Mutual Fund Flows and Performance in Rational Markets," NBER Working Papers 9275, National Bureau of Economic Research, Inc.
  13. Merton, Robert C, 1981. "On Market Timing and Investment Performance. I. An Equilibrium Theory of Value for Market Forecasts," The Journal of Business, University of Chicago Press, vol. 54(3), pages 363-406, July.
  14. Ludovic Phalippou, 2009. "Beware of Venturing into Private Equity," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 147-66, Winter.
  15. 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.
  16. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
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Cited by:
  1. Ron Bird & Harry Liem & Susan Thorp, 2011. "Infrastructure: Real Assets and Real Returns," Working Paper Series 11, The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney.

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