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Managing investment risks of institutional private equity investors: The challenge of illiquidity

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  • Kaserer, Christoph
  • Wagner, Niklas
  • Achleitner, Ann-Kristin

Abstract

Since private equity investments are not publicly traded, a key issue in measuring investment risks of institutional private equity investors arises from a careful measurement of investment returns in the first place. Prices of private equity investments are typically observed at low frequency and are determined by transactions under low liquidity. This contribution highlights useful approaches to the problem of return measurement under conditions of illiquidity. Then, specific risk management issues, including asset allocation issues, are discussed. --

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Bibliographic Info

Paper provided by Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München in its series CEFS Working Paper Series with number 2003-01.

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Date of creation: 2003
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Handle: RePEc:zbw:cefswp:200301

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Related research

Keywords: private equity; risk/return measurement; net asset values; cash flows; illiquidity; stale pricing; risk management; asset allocation;

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References

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  1. Steven Kaplan & Antoinette Schoar, 2003. "Private Equity Performance: Returns, Persistence and Capital," NBER Working Papers 9807, National Bureau of Economic Research, Inc.
  2. Liang Peng, 2001. "A New Approach of Valuing Illiquid Asset Portfolios," Yale School of Management Working Papers, Yale School of Management ysm175, Yale School of Management, revised 01 Aug 2001.
  3. Lo, Andrew W. & Craig MacKinlay, A., 1990. "An econometric analysis of nonsynchronous trading," Journal of Econometrics, Elsevier, Elsevier, vol. 45(1-2), pages 181-211.
  4. Cochrane, John H., 2005. "The risk and return of venture capital," Journal of Financial Economics, Elsevier, Elsevier, vol. 75(1), pages 3-52, January.
  5. G. C. Reid & N. G. Terry & J. A. Smith, 1997. "Risk management in venture capital investor?investee relations," The European Journal of Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 3(1), pages 27-47.
  6. Cohen, Kalman J. & Hawawini, Gabriel A. & Maier, Steven F. & Schwartz, Robert A. & Whitcomb, David K., 1983. "Friction in the trading process and the estimation of systematic risk," Journal of Financial Economics, Elsevier, Elsevier, vol. 12(2), pages 263-278, August.
  7. 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.
  8. Longstaff, Francis A, 1995. " How Much Can Marketability Affect Security Values?," Journal of Finance, American Finance Association, American Finance Association, vol. 50(5), pages 1767-74, December.
  9. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(3), pages 309-327, December.
  10. 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.
  11. Norton, Edgar & Tenenbaum, Bernard H., 1993. "Specialization versus diversification as a venture capital investment strategy," Journal of Business Venturing, Elsevier, vol. 8(5), pages 431-442, September.
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Cited by:
  1. Buchner, Axel & Kaserer, Christoph & Wagner, Niklas, 2006. "Stochastic modeling of private equity: an equilibrium based approach to fund valuation," CEFS Working Paper Series, Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München 2006-02, Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München.

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