IDEAS home Printed from https://ideas.repec.org/p/zbw/cefswp/200602.html
   My bibliography  Save this paper

Stochastic modeling of private equity: an equilibrium based approach to fund valuation

Author

Listed:
  • Buchner, Axel
  • Kaserer, Christoph
  • Wagner, Niklas

Abstract

In this paper, we present a new approach to measure the returns of private equity investments based on a stochastic model of the dynamics of a private equity fund. Our stochastic model of a private equity fund consists of two independent stages: the stochastic model of the capital drawdowns and the stochastic model of the capital distributions over a fund's lifetime. Capital distributions are assumed to follow lognormal distributions in our approach. A mean-reverting square-root process is applied to model the rate at which capital is drawn over time. Applying equilibrium intertemporal asset pricing consideration, we are able to derive closed-form solutions for the market value and time-weighted model returns of a private equity fund.

Suggested Citation

  • Buchner, Axel & Kaserer, Christoph & Wagner, Niklas, 2006. "Stochastic modeling of private equity: an equilibrium based approach to fund valuation," CEFS Working Paper Series 2006-02, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
  • Handle: RePEc:zbw:cefswp:200602
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/48440/1/577822632.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Kaserer, Christoph & Wagner, Niklas & Achleitner, Ann-Kristin, 2003. "Managing investment risks of institutional private equity investors: The challenge of illiquidity," CEFS Working Paper Series 2003-01, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
    2. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
    3. Inderst, Roman & Muller, Holger M., 2004. "The effect of capital market characteristics on the value of start-up firms," Journal of Financial Economics, Elsevier, vol. 72(2), pages 319-356, May.
    4. Diller, Christian & Kaserer, Christoph, 2004. "European private equity funds: A cash flow based performance analysis," CEFS Working Paper Series 2004-01, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
    5. 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.
    6. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
    7. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Private Equity Funds; Stochastic Modeling; Mean-Reverting Square-Root Process; Incomplete Markets;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:cefswp:200602. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics). General contact details of provider: http://edirc.repec.org/data/fwtumde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.