Private Equity Performance and Liquidity Risk

Francesco Franzoni, Eric Nowak and Ludovic Phalippou
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Francesco Franzoni: University of Lugano and Swiss Finance Institute
Eric Nowak: University of Lugano and Swiss Finance Institute
Ludovic Phalippou: University of Amsterdam Business School

No 09-43, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This is the first study that provides evidence of liquidity risk in a large sample of private equity investments. It relies on the realized cash flows of 4,403 liquidated in- vestments. We find that a one standard deviation increase in unexpected aggregate liquidity raises returns between 4% and 10% annually, depending on liquidity measures. This effect is robust to controlling for investment characteristics and macroeconomic variables. Larger investments and investments from more mature private equity firms have returns that are more sensitive to unexpected liquidity. Using the Pástor and Stambaugh (2003) traded liquidity factor, we estimate a liquidity risk premium in pri- vate equity of about 3% annually. Accounting for liquidity risk, the historical cost of capital for private equity is about 24% annually and the alpha (before fees) is close to zero.

Keywords: Private equity; Liquidity risk; Cost of capital (search for similar items in EconPapers)
JEL-codes: C51 G12 G23 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2009-11
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0943

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