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Risk and expected returns of private equity investments: Evidence based on market prices

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Listed author(s):
  • Jegadeesh, Narasimhan
  • Kräussl, Roman
  • Pollet, Joshua

Abstract

We estimate the risk and expected returns of private equity investments based on the market prices of exchange traded funds of funds that invest in unlisted private equity funds. Our results indicate that the market expects unlisted private equity funds to earn abnormal returns of about one to two percent. We also find that the market expects listed private equity funds to earn zero to marginally negative abnormal returns net of fees. Both listed and unlisted private equity funds have market betas close to one and positive factor loadings on the Fama-French SMB factor. Private equity fund returns are positively correlated with GDP growth and negatively correlated with the credit spread. Finally, we find that market returns of exchange traded funds of funds and listed private equity funds predict changes in self-reported book values of unlisted private equity funds.

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Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2010/04.

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Date of creation: 2010
Handle: RePEc:zbw:cfswop:201004
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Keywords: Private Equity; Listed Private Equity; Risk-Return Characteristics; Funds of Funds;

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Find related papers by JEL classification:
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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  1. Arthur Korteweg & Morten Sorensen, 2010. "Risk and Return Characteristics of Venture Capital-Backed Entrepreneurial Companies," Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3738-3772, October.
  2. Koopman, Siem Jan & Kräussl, Roman & Lucas, André & Monteiro, André B., 2009. "Credit cycles and macro fundamentals," Journal of Empirical Finance, Elsevier, vol. 16(1), pages 42-54, January.
  3. Ludovic Phalippou & Oliver Gottschalg, 2009. "The Performance of Private Equity Funds," Review of Financial Studies, Society for Financial Studies, vol. 22(4), pages 1747-1776, April.
  4. 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.
  5. 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.
  6. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  7. Fama, Eugene F, 1990. " Stock Returns, Expected Returns, and Real Activity," Journal of Finance, American Finance Association, vol. 45(4), pages 1089-1108, September.
  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.
  9. Kaplan, Steven N. & Stein, Jeremy C., 1990. "How risky is the debt in highly leveraged transactions?," Journal of Financial Economics, Elsevier, vol. 27(1), pages 215-245, September.
  10. Steven N. Kaplan & Jeremy C. Stein, 1990. "How Risky is the Debt in Highly Leveraged Transactions? Evidence from Public Recapitalizations," NBER Working Papers 3390, National Bureau of Economic Research, Inc.
  11. Brophy, David J. & Guthner, Mark W., 1988. "Publicly traded venture capital funds: implications for institutional "fund of funds" investors," Journal of Business Venturing, Elsevier, vol. 3(3), pages 187-206.
  12. Cochrane, John H., 2005. "The risk and return of venture capital," Journal of Financial Economics, Elsevier, vol. 75(1), pages 3-52, January.
  13. 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, August.
  14. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1991. " Investor Sentiment and the Closed-End Fund Puzzle," Journal of Finance, American Finance Association, vol. 46(1), pages 75-109, March.
  15. Quigley, John M. & Woodward, Susan E., 2003. "An Index for Venture Capital," Department of Economics, Working Paper Series qt15g2h7g9, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  16. Francesco Franzoni & Eric Nowak & Ludovic Phalippou, 2012. "Private Equity Performance and Liquidity Risk," Journal of Finance, American Finance Association, vol. 67(6), pages 2341-2373, December.
  17. Martin, John D. & Petty, J. William, 1983. "An Analysis of the Performance of Publicly Traded Venture Capital Companies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(03), pages 401-410, September.
  18. Gompers, Paul & Lerner, Josh, 1999. "An analysis of compensation in the U.S. venture capital partnership," Journal of Financial Economics, Elsevier, vol. 51(1), pages 3-44, January.
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Cited by:

  1. Robert S. Harris & Tim Jenkinson & Steven N. Kaplan, 2014. "Private Equity Performance: What Do We Know?," Journal of Finance, American Finance Association, vol. 69(5), pages 1851-1882, October.
  2. Rin, Marco Da & Hellmann, Thomas & Puri, Manju, 2013. "A Survey of Venture Capital Research," Handbook of the Economics of Finance, Elsevier.
  3. Morten Sorensen & Neng Wang & Jinqiang Yang, 2014. "Valuing Private Equity," Review of Financial Studies, Society for Financial Studies, vol. 27(7), pages 1977-2021.
  4. Robinson, David T. & Sensoy, Berk A., 2016. "Cyclicality, performance measurement, and cash flow liquidity in private equity," Journal of Financial Economics, Elsevier, vol. 122(3), pages 521-543.

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