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

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Listed:
  • Brian Boyer
  • Taylor D. Nadauld
  • Keith P. Vorkink
  • Michael S. Weisbach

Abstract

Standard measures of private equity performance based on cash flows overlook discount rate risk. An index constructed from prices paid in secondary market transactions indicates that private equity discount rates vary considerably. While the standard alpha for our index is zero, measures of performance based on cash flow data for funds in our index are large and positive. To illustrate that results are not driven by idiosyncrasies of private equity secondary markets, we obtain similar results using cash flows and returns 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 Boyer & Taylor D. Nadauld & Keith P. Vorkink & Michael S. Weisbach, 2021. "Discount Rate Risk in Private Equity: Evidence from Secondary Market Transactions," NBER Working Papers 28691, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28691
    Note: AP CF
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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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