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.
Driessen, J. J. A. G., Lin, T. C., & Phalippou, L. (2012). A new method to estimate risk and return of non-traded assets from cash flows: The case of private equity funds. Journal of Financial and Quantitative Analysis, 47(3), 511-535. https://doi.org/10.1017/s0022109012000221