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A New Method to Estimate Risk and Return of Nontraded Assets from Cash Flows: The Case of Private Equity Funds

Published online by Cambridge University Press:  20 April 2012

Joost Driessen ,
Tse-Chun Lin  and
Ludovic Phalippou
Joost Driessen
Affiliation:
Faculty of Economics and Business, Tilburg University, PO Box 90153, 5000 LE, Tilburg, The Netherlands; j.j.a.g.driessen@uvt.nl
Tse-Chun Lin
Affiliation:
School of Economics and Finance, University of Hong Kong, Room 928, KKL Building, Pokfulam Road, Hong Kong; tsechunlin@hku.hk
Ludovic Phalippou
Affiliation:
Said Business School, University of Oxford, Park End Street, Oxford, OX1 1HP, UK. ludovic.phalippou@gmail.com
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Abstract

We develop a new methodology to estimate abnormal performance and risk exposure of nontraded assets from cash flows. Our methodology extends the standard internal rate of return approach to a dynamic setting. The small-sample properties are validated using a simulation study. We apply the method to a sample of 958 private equity funds. For venture capital funds, we find a high market beta and underperformance before and after fees. For buyout funds, we find a relatively low market beta and no evidence for outperformance. We find that self-reported net asset values significantly overstate fund values for mature and inactive funds.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 3 , June 2012 , pp. 511 - 535
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

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