Private Equity Performance and Risk
Argentum, in cooperation with NHH and SIFR, will arrange the Argentum Conference and Symposium in Stockholm this September. One of the objectives is to highlight the latest in private equity research. Leading up to the conference, we will present an introduction to one of the papers that will be presented each week.
Ludovic Phalippou (University of Amsterdam): Private Equity Funds' Performance, Risk and Selection
This paper sets out to investigate whether liquidity risk is a significant determinant of returns in private equity and is the first study to prove there is evidence of liquidity risk in a large sample of private equity investments.
The finding shows that a one standard deviation increase in aggregate liquidity raises returns between 4 and 10 percent annually, depending on the liquidity measures used. This effect is robust to controlling for investment characteristics and macroeconomic conditions.
In addition, it is also evident that larger and more mature investments have returns that are more are more sensitive to liquidity conditions, which are explained by the authors as a result of having investors with deeper pockets or that they are more levered.
Using the Pastor and Stambaugh (2003) traded liquidity factor, the authors estimate a risk premium in private equity of about 3 percent annually.
Hence, accounting for liquidity risk, the historical cost of capital for private equity is about 24 percent annually and the alpha (before fees) is close to zero.
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| Date | 2010-08-31 |
| Source | |
| Geography | European |
| Stage | Small/mid-cap buyout |
| Type | Insight & analysis |
| Language | English |
| Document | |