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

Taylor Nadauld, Berk A. Sensoy, Keith Vorkink and Michael Weisbach
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Taylor Nadauld: Brigham Young University
Berk A. Sensoy: Ohio State University
Keith Vorkink: Brigham Young University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

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: 2016-06
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Citations: View citations in EconPapers (4)

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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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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2016-11

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