Valuing Private Equity Strip by Strip

Stijn Van Nieuwerburgh and Arpit Gupta

No 14241, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We propose a new valuation method for private equity investments. First, we construct a cash-flow replicating portfolio for the private investment, applying Machine Learning techniques on cash-flows on various listed equity and fixed income instruments. The second step values the replicating portfolio using a flexible asset pricing model that accurately prices the systematic risk in bonds of different maturities and a broad cross-section of equity factors. The method delivers a measure of the risk-adjusted profit earned on a PE investment and a time series for the expected return on PE fund categories. We apply the method to buyout, venture capital, real estate, and infrastructure funds, among others. Accounting for horizon-dependent risk and exposure to a broad cross-section of equity factors results in negative average risk-adjusted profits. Substantial cross-sectional variation and persistence in performance suggests some funds outperform. We also find declining expected returns on PE funds in the later part of the sample.

Keywords: Private equity; Valuation; Temporal pricing of risk; Cross-section of returns; Buyout; Venture capital; Real estate; Infrastructure; Natural resources; Affine asset pricing models (search for similar items in EconPapers)
JEL-codes: G12 G24 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-big and nep-cmp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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