The Liquidity Cost of Private Equity Investments: Evidence from Secondary Market Transactions

Taylor D. Nadauld, Berk A. Sensoy, Keith Vorkink and Michael Weisbach

No 22404, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: An important cost of investing in private equity is the illiquidity of these investments. In response to this illiquidity, a secondary market for transacting stakes in private equity funds has developed. This paper uses proprietary data from a leading intermediary to understand the magnitude and determinants of transaction costs in this market. Most transactions occur at a discount to net asset value. Buyers average an annualized Public Market Equivalent (PME) of 1.023 compared to 0.974 for sellers, implying that buyers outperform sellers by a market-adjusted five percentage points annually. For the most common type of transaction, the sale of stakes in funds four to nine years old, the difference is smaller, about three percentage points. Both the discount to NAV and the difference in returns between buyers and sellers returns appear to be related to factors associated with asymmetric information and market depth. Buyers in this market tend to be funds-of-funds, while sellers are more likely to be traditional private equity investors such as endowments and pension funds.

JEL-codes: G11 G23 G24 (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-ger
Note: AP CF
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Citations: View citations in EconPapers (4)

Published as Taylor D. Nadauld & Berk A. Sensoy & Keith Vorkink & Michael S. Weisbach, 2018. "nThe liquidity cost of private equity investments: Evidence from secondary market transactions," Journal of Financial Economics, .

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Related works:
Journal Article: The liquidity cost of private equity investments: Evidence from secondary market transactions (2019)
Working Paper: The Liquidity Cost of Private Equity Investments: Evidence from Secondary Market Transactions (2016)
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