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A New Method to Estimate Risk and Return of Non-Traded Assets from Cash Flows: The Case of Private Equity Funds

  • Joost Driessen
  • Tse-Chun Lin
  • Ludovic Phalippou

We develop a new GMM-style methodology with good small-sample properties to assess the abnormal performance and risk exposure of a non-traded asset from a cross-section of cash flow data. We apply this method to a sample of 958 mature private equity funds spanning 24 years. Our methodology uses actual cash flow data and not intermediary self-reported Net Asset Values. In addition, it does not require a distributional assumption for returns. For venture capital funds, we find a high market beta and significant under-performance. For buyout funds, we find a low beta and no abnormal performance, but the sample is small. Larger funds have higher returns due to higher risk exposures and not higher alphas. We also find that Net Asset Values significantly overstate fund market values for the subset of mature and inactive funds.

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File URL: http://www.nber.org/papers/w14144.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14144.

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Date of creation: Jun 2008
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Publication status: published as Driessen, Joost & Lin, Tse-Chun & Phalippou, Ludovic, 2012. "A New Method to Estimate Risk and Return of Nontraded Assets from Cash Flows: The Case of Private Equity Funds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(03), pages 511-535, June.
Handle: RePEc:nbr:nberwo:14144
Note: AP CF
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. Ayako Yasuda & Andrew Metrick, 2007. "The economics of private equity funds," Proceedings, Federal Reserve Bank of San Francisco, issue Oct.
  2. Cochrane, John, 2000. "The Risk and Return of Venture Capital," University of California at Los Angeles, Anderson Graduate School of Management qt7qm9h594, Anderson Graduate School of Management, UCLA.
  3. Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2004. "The Cross-Section of Volatility and Expected Returns," NBER Working Papers 10852, National Bureau of Economic Research, Inc.
  4. Axelson, Ulf & Strömberg, Per Johan & Weisbach, Michael, 2007. "Why are Buyouts Leveraged? The Financial Structure of Private Equity Firms," CEPR Discussion Papers 6133, C.E.P.R. Discussion Papers.
  5. Jerry Cao & Josh Lerner, 2006. "The Performance of Reverse Leveraged Buyouts," NBER Working Papers 12626, National Bureau of Economic Research, Inc.
  6. Gompers, Paul & Lerner, Josh, 2000. "Money chasing deals? The impact of fund inflows on private equity valuation," Journal of Financial Economics, Elsevier, vol. 55(2), pages 281-325, February.
  7. Michael Ewens & Charles Jones & Matthew Rhodes-Kropf, . "The Price of Diversifiable Risk in Venture Capital and Private Equity," GSIA Working Papers 2012-E55, Carnegie Mellon University, Tepper School of Business.
  8. Steven N. Kaplan & Antoinette Schoar, 2005. "Private Equity Performance: Returns, Persistence, and Capital Flows," Journal of Finance, American Finance Association, vol. 60(4), pages 1791-1823, 08.
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