A new method to estimate risk and return of non-traded assets from cash flows

The case of private equity funds

J.J.A.G. Driessen, T.C. Lin, L. Phalippou

Research output: Contribution to journalArticleScientificpeer-review

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.
Original languageEnglish
Pages (from-to)511-535
JournalJournal of Financial and Quantitative Analysis
Volume47
Issue number3
DOIs
Publication statusPublished - 2012

Fingerprint

Private equity
Assets
Cash flow
Risk and return
Methodology
Venture capital
Underperformance
Asset value
Buy-out
Internal rate of return
Fees
Simulation study
Risk exposure
Small sample properties

Cite this

@article{172a97528f2f43b2a964cd8021efc832,
title = "A new method to estimate risk and return of non-traded assets from cash flows: The case of private equity funds",
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.",
author = "J.J.A.G. Driessen and T.C. Lin and L. Phalippou",
year = "2012",
doi = "10.1017/s0022109012000221",
language = "English",
volume = "47",
pages = "511--535",
journal = "Journal of Financial and Quantitative Analysis",
issn = "0022-1090",
publisher = "Cambridge University Press",
number = "3",

}

A new method to estimate risk and return of non-traded assets from cash flows : The case of private equity funds. / Driessen, J.J.A.G.; Lin, T.C.; Phalippou, L.

In: Journal of Financial and Quantitative Analysis, Vol. 47, No. 3, 2012, p. 511-535.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - A new method to estimate risk and return of non-traded assets from cash flows

T2 - The case of private equity funds

AU - Driessen, J.J.A.G.

AU - Lin, T.C.

AU - Phalippou, L.

PY - 2012

Y1 - 2012

N2 - 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.

AB - 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.

U2 - 10.1017/s0022109012000221

DO - 10.1017/s0022109012000221

M3 - Article

VL - 47

SP - 511

EP - 535

JO - Journal of Financial and Quantitative Analysis

JF - Journal of Financial and Quantitative Analysis

SN - 0022-1090

IS - 3

ER -