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Managing investment risks of institutional private equity investors: The challenge of illiquidity

  • Kaserer, Christoph
  • Wagner, Niklas
  • Achleitner, Ann-Kristin

Since private equity investments are not publicly traded, a key issue in measuring investment risks of institutional private equity investors arises from a careful measurement of investment returns in the first place. Prices of private equity investments are typically observed at low frequency and are determined by transactions under low liquidity. This contribution highlights useful approaches to the problem of return measurement under conditions of illiquidity. Then, specific risk management issues, including asset allocation issues, are discussed.

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Paper provided by Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München in its series CEFS Working Paper Series with number 2003-01.

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Date of creation: 2003
Date of revision:
Handle: RePEc:zbw:cefswp:200301
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  1. Mila Getmansky & Andrew W. Lo & Igor Makarov, 2003. "An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns," NBER Working Papers 9571, National Bureau of Economic Research, Inc.
  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 W. Lo & Craig A. MacKinlay, . "An Econometric Analysis of Nonsyschronous-Trading," Rodney L. White Center for Financial Research Working Papers 19-89, Wharton School Rodney L. White Center for Financial Research.
  4. Norton, Edgar & Tenenbaum, Bernard H., 1993. "Specialization versus diversification as a venture capital investment strategy," Journal of Business Venturing, Elsevier, vol. 8(5), pages 431-442, September.
  5. Longstaff, Francis A, 1995. " How Much Can Marketability Affect Security Values?," Journal of Finance, American Finance Association, vol. 50(5), pages 1767-74, December.
  6. Liang Peng, 2001. "A New Approach of Valuing Illiquid Asset Portfolios," Yale School of Management Working Papers ysm175, Yale School of Management, revised 01 Aug 2001.
  7. G. C. Reid & N. G. Terry & J. A. Smith, 1997. "Risk management in venture capital investor?investee relations," The European Journal of Finance, Taylor & Francis Journals, vol. 3(1), pages 27-47.
  8. Steven Kaplan & Antoinette Schoar, 2003. "Private Equity Performance: Returns, Persistence and Capital," NBER Working Papers 9807, National Bureau of Economic Research, Inc.
  9. Alexander Ljungqvist & Matthew Richardson, 2003. "The cash flow, return and risk characteristics of private equity," NBER Working Papers 9454, National Bureau of Economic Research, Inc.
  10. Cohen, Kalman J. & Hawawini, Gabriel A. & Maier, Steven F. & Schwartz, Robert A. & Whitcomb, David K., 1983. "Friction in the trading process and the estimation of systematic risk," Journal of Financial Economics, Elsevier, vol. 12(2), pages 263-278, August.
  11. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
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