The Valuation of Illiquid Assets: A Focus on Private Equity and Real Estate

Rajna Gibson, Martin Hoesli and Jiajun Shan
Additional contact information
Rajna Gibson: University of Geneva - Geneva Finance Research Institute (GFRI); European Corporate Governance Institute (ECGI)
Jiajun Shan: University of Geneva

No 22-12, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper reviews methods that can be used to value illiquid investments, with a particular focus on private equity and real estate. We discuss the traditional valuation methods, in particular the net present value (NPV) rule, and show in what circumstances these can lead to suboptimal investment decisions. Emphasis is placed on a real option valuation framework that can alleviate some of the drawbacks of traditional approaches. A new jump–diffusion option pricing model and a numerical example are presented to show the usefulness of such a framework in valuing illiquid assets and in particular venture capital funds. We maintain that, under harmonized parameter estimation techniques, the NPV rule can be viewed as the lower bound in a competitive market and the real option exercise criteria and valuation models as providing the upper bound to value and time investments in illiquid assets. The knowledge of such bounds should enhance the decision–making process with respect to allocating funds to alternative investments.

Keywords: Valuation; Illiquid Assets; Private Equity; Real Estate; Real Options (search for similar items in EconPapers)
JEL-codes: G12 R33 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2022-02
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4024993 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2212

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().