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

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...

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Published in:Journal of financial and quantitative analysis 2012-06, Vol.47 (3), p.511-535
Main Authors: Driessen, Joost, Lin, Tse-Chun, Phalippou, Ludovic
Format: Article
Language:English
Subjects:
Assets
Capital costs
Cash flow
Dividends
Economic dynamics
Equity
Fees
Financial investments
Inactive
Internal rate of return
Investment risk
Investors
Methodology
Private equity
Quantitative analysis
Simulation
Venture capital
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cited_by cdi_FETCH-LOGICAL-c527t-447d7129a87b0092bdba11b9f3237b5f3035401f35765a0e8772ef30b4921f833
cites cdi_FETCH-LOGICAL-c527t-447d7129a87b0092bdba11b9f3237b5f3035401f35765a0e8772ef30b4921f833
container_end_page 535
container_issue 3
container_start_page 511
container_title Journal of financial and quantitative analysis
container_volume 47
creator Driessen, Joost
Lin, Tse-Chun
Phalippou, Ludovic
description 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.
doi_str_mv 10.1017/S0022109012000221
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source EconLit s plnými texty; International Bibliography of the Social Sciences (IBSS); ABI/INFORM Collection; Business Source Ultimate; Cambridge University Press; JSTOR Journals and Primary Sources
subjects Assets
Capital costs
Cash flow
Dividends
Economic dynamics
Equity
Fees
Financial investments
Inactive
Internal rate of return
Investment risk
Investors
Methodology
Private equity
Quantitative analysis
Simulation
Venture capital
title A New Method to Estimate Risk and Return of Nontraded Assets from Cash Flows: The Case of Private Equity Funds
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