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How much can lack of marketability affect private equity fund values?

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  • Buchner, Axel

Abstract

This paper derives an upper bound on the discounts for lack of marketability of private equity funds using option-pricing theory. The upper bound is a function of the volatility of the fund returns, of the (remaining) lifetime of the fund, of two parameters governing the speed of capital drawdowns and distributions, of the volatility of the stock market returns, and of the return correlation between the fund and the stock market. The model calibration and numerical analysis deliver several novel insights about how non-marketability affects the value: (i) upper boundary discounts are increasing functions of the return volatility of the fund, of the return volatility of the stock market, and of the average time over which a dollar committed remains invested in the fund; (ii) upper boundary discounts decrease non-linearly over the finite lifetime of a fund; (iii) estimated upper boundary discounts at the start of an average private equity fund equal $35.3 relative to $100 committed, which corresponds to an annual upper boundary return premium demanded for lack of marketability of around 7%; and (iv) estimated upper boundary discounts of venture and buyout funds are around the same magnitude, though, discounts of venture capital funds are slightly higher.

Suggested Citation

  • Buchner, Axel, 2016. "How much can lack of marketability affect private equity fund values?," Review of Financial Economics, Elsevier, vol. 28(C), pages 35-45.
  • Handle: RePEc:eee:revfin:v:28:y:2016:i:c:p:35-45
    DOI: 10.1016/j.rfe.2015.10.002
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    References listed on IDEAS

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    1. Massimiliano Celli, 2017. "Minority Discount for Reduced Powers in Negotiations of Non-Listed Minority Holdings: Evidence from European Countries," International Journal of Business and Management, Canadian Center of Science and Education, vol. 12(4), pages 1-23, March.
    2. Radosław Pastusiak & Jakub Keller & Michał Radke, 2020. "Marketability Discount in Various Economic Environments. Comparison of Developed and Emerging Markets on the Example of the USA and Poland," JRFM, MDPI, vol. 13(6), pages 1-15, June.

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    More about this item

    Keywords

    Private equity funds; Marketability; Option-pricing;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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