Valuing Private Equity Strip by Strip / Arpit Gupta, Stijn Van Nieuwerburgh.

Format:

Book

Author/Creator:

Gupta, Arpit.

Contributor:

National Bureau of Economic Research.

Van Nieuwerburgh, Stijn.

Series:

Working Paper Series (National Bureau of Economic Research) no. w26514.

NBER working paper series no. w26514

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

We propose a new valuation method for private equity investments. First, we construct a cash-flow replicating portfolio for the private investment, applying Machine Learning techniques on cash-flows on various listed equity and fixed income instruments. The second step values the replicating portfolio using a flexible asset pricing model that accurately prices the systematic risk in bonds of different maturities and a broad cross-section of equity factors. The method delivers a measure of the risk-adjusted profit earned on a PE investment and a time series for the expected return on PE fund categories. We apply the method to buyout, venture capital, real estate, and infrastructure funds, among others. Accounting for horizon-dependent risk and exposure to a broad cross-section of equity factors results in negative average risk-adjusted profits. Substantial cross-sectional variation and persistence in performance suggests some funds outperform. We also find declining expected returns on PE funds in the later part of the sample.

Notes:

Print version record

November 2019.