Fat tails in private equity fund returns: The smooth double Pareto distribution

Henry Lahr

International Review of Financial Analysis, 2023, vol. 86, issue C

Abstract: Does the distribution of private equity returns have fat tails? A new smooth double Pareto distribution can explain the stationary distribution of private equity funds' valuation multiples. This distribution emerges from a random growth model with lognormally distributed initial fund valuations. This model endogenously generates power-law tails in the stationary cross-section. The new distribution fits the data better than competing distributions. Fat tails are particularly pronounced in venture capital funds and suggest returns with infinite variance over the lifetime of the fund. The smooth double Pareto distribution has wide applicability to growth processes with a random initial value.

Keywords: Size distribution; Income distribution; Pareto law; Power-law distribution; Fat tails; Private equity; Venture capital; Financial returns (search for similar items in EconPapers)
JEL-codes: C46 D31 G24 G32 L11 R12 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:86:y:2023:i:c:s1057521922004215

DOI: 10.1016/j.irfa.2022.102471

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