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

2012/04/20 by Joost Driessen, Tse-Chun Lin, Tse‐Chun Lin +1 · 1 citation
Business, Management and Accounting · Economics, Econometrics and Finance · #Private Equity and Venture Capital #Financial Markets and Investment Strategies #Corporate Finance and Governance

paper · doi:10.1017/s0022109012000221

Abstract

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.

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