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Discount‐Rate Risk in Private Equity: Evidence from Secondary Market Transactions

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  • BRIAN H. BOYER
  • TAYLOR D. NADAULD
  • KEITH P. VORKINK
  • MICHAEL S. WEISBACH

Abstract

Measures of private equity (PE) performance based on cash flows do not account for a discount‐rate risk premium that is a component of the capital asset pricing model (CAPM) alpha. We create secondary market PE indices and find that PE discount rates vary considerably. Net asset values are too smooth because they fail to reflect variation in discount rates. Although the CAPM alpha for our index is zero, the generalized public market equivalent based on cash flows is large and positive. We obtain similar results for a set of synthetic funds that invest in small cap stocks. Ignoring variation in PE discount rates can lead to a misallocation of capital.

Suggested Citation

  • Brian H. Boyer & Taylor D. Nadauld & Keith P. Vorkink & Michael S. Weisbach, 2023. "Discount‐Rate Risk in Private Equity: Evidence from Secondary Market Transactions," Journal of Finance, American Finance Association, vol. 78(2), pages 835-885, April.
  • Handle: RePEc:bla:jfinan:v:78:y:2023:i:2:p:835-885
    DOI: 10.1111/jofi.13202
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