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Valuing Private Equity

  • Morten Sorensen
  • Neng Wang
  • Jinqiang Yang

We investigate whether the performance of Private Equity (PE) investments is sufficient to compensate investors (LPs) for risk, long-term illiquidity, management and incentive fees charged by the general partner (GP). We analyze the LP's portfolio-choice problem and find that management fees, carried interest and illiquidity are costly, and GPs must generate substantial alpha to compensate LPs for bearing these costs. Debt is cheap and reduces these costs, potentially explaining the high leverage of buyout transactions. Conventional interpretations of PE performance measures appear optimistic. On average, LPs may just break even, net of management fees, carry, risk, and costs of illiquidity.

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File URL: http://www.nber.org/papers/w19612.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19612.

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Date of creation: Nov 2013
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Publication status: published as Morten Sorensen & Neng Wang & Jinqiang Yang, 2014. "Valuing Private Equity," Review of Financial Studies, Society for Financial Studies, vol. 27(7), pages 1977-2021.
Handle: RePEc:nbr:nberwo:19612
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