Stochastic modeling of private equity: an equilibrium based approach to fund valuation
AbstractIn this paper, we present a new approach to measure the returns of private equity investments based on a stochastic model of the dynamics of a private equity fund. Our stochastic model of a private equity fund consists of two independent stages: the stochastic model of the capital drawdowns and the stochastic model of the capital distributions over a fund's lifetime. Capital distributions are assumed to follow lognormal distributions in our approach. A mean-reverting square-root process is applied to model the rate at which capital is drawn over time. Applying equilibrium intertemporal asset pricing consideration, we are able to derive closed-form solutions for the market value and time-weighted model returns of a private equity fund. --
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Bibliographic InfoPaper provided by Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München in its series CEFS Working Paper Series with number 2006-02.
Date of creation: 2006
Date of revision:
Private Equity Funds; Stochastic Modeling; Mean-Reverting Square-Root Process; Incomplete Markets;
Find related papers by JEL classification:
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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