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A Simple Utility Approach to Private Equity Sales

Author

Listed:
  • Robert Dubil

    (San Jose State University)

Abstract

The paper examines the liquidity risk of a private equity firm that decides to dispose of a large holding in its portfolio. As the sale takes time, it requires a careful balancing act of the exposure to the fluctuations in the market value of the investment against the large sale-induced price depression. A mean-standard deviation utility framework is an appealing decision tool for optimizing protracted asset dispositions. The firm maximizes the expected profit from the sale strategy net of the price concession minus a penalty function for exposure to the price risk, with the penalty weight related to a loss confidence interval.

Suggested Citation

  • Robert Dubil, 2003. "A Simple Utility Approach to Private Equity Sales," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 8(1), pages 103-110, Spring.
  • Handle: RePEc:pep:journl:v:8:y:2003:i:1:p:103-110
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    More about this item

    Keywords

    Private Equity; Utility; Venture Capital;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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