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

2012 ◽  
Vol 47 (3) ◽  
pp. 511-535 ◽  
Author(s):  
Joost Driessen ◽  
Tse-Chun Lin ◽  
Ludovic Phalippou
Keyword(s):  
Private Equity ◽  
Cash Flows ◽  
Small Sample ◽  
Dynamic Setting ◽  
Equity Funds ◽  
Before And After ◽  
Market Beta ◽  
Small Sample Properties ◽  
Private Equity Funds ◽  
Nontraded Assets

AbstractWe 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.

Private Equity Net Asset Values and Future Cash Flows

2019 ◽  
Vol 95 (1) ◽  
pp. 191-210 ◽  
Author(s):  
Tim Jenkinson ◽  
Wayne R. Landsman ◽  
Brian R. Rountree ◽  
Kazbi Soonawalla
Keyword(s):  
Private Equity ◽  
Fair Value ◽  
Cash Flows ◽  
Systematic Bias ◽  
Private Equity Fund ◽  
Fund Managers ◽  
Asset Values ◽  
Equity Funds ◽  
Private Equity Funds ◽  
Future Cash Flows

ABSTRACT This study analyzes whether fair value estimates of fund net asset values (NAVs) produced by private equity managers are accurate and unbiased predictors of future discounted cash flows (DCFs). We exploit the fact that private equity funds have finite lives to compare reported NAVs to DCFs based on realized cash flows for 384 Venture Capital (VC) funds and 195 Buyout funds spanning 1988–2016. Findings reveal that Buyout funds' NAVs display little systematic bias, but VC funds' NAVs are relatively aggressively biased compared to Buyout funds, especially since 2000. Accuracy is worse in the first half of the sample period even though NAV estimates generally are more conservative. Overall, the results reveal significant differences in the association between NAVs and DCFs for Buyout versus VC funds, which is particularly important for private equity fund investors in their consideration of the relevance and reliability of NAV estimates provided by fund managers.

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