The Liquidity Cost of Private Equity Investments: Evidence from Secondary Market Transactions / Taylor D. Nadauld, Berk A. Sensoy, Keith Vorkink, Michael S. Weisbach.

Format:

Book

Author/Creator:

Nadauld, Taylor D.

Contributor:

National Bureau of Economic Research.

Sensoy, Berk A.

Vorkink, Keith.

Weisbach, Michael S.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22404.

NBER working paper series no. w22404

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Liquidity Cost of Private Equity Investments

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

An important cost of investing in private equity is the illiquidity of these investments. In response to this illiquidity, a secondary market for transacting stakes in private equity funds has developed. This paper uses proprietary data from a leading intermediary to understand the magnitude and determinants of transaction costs in this market. Most transactions occur at a discount to net asset value. Buyers average an annualized Public Market Equivalent (PME) of 1.023 compared to 0.974 for sellers, implying that buyers outperform sellers by a market-adjusted five percentage points annually. For the most common type of transaction, the sale of stakes in funds four to nine years old, the difference is smaller, about three percentage points. Both the discount to NAV and the difference in returns between buyers and sellers returns appear to be related to factors associated with asymmetric information and market depth. Buyers in this market tend to be funds-of-funds, while sellers are more likely to be traditional private equity investors such as endowments and pension funds.

Notes:

Print version record

July 2016.