Stochastic modeling of private equity: an equilibrium based approach to fund valuation

Axel Buchner, Christoph Kaserer and Niklas Wagner

No 2006-02, CEFS Working Paper Series from Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS)

Abstract: In this paper, we present a new approach to measure the returns of private equity investments based on a stochastic model of the dynamics of a private equity fund. Our stochastic model of a private equity fund consists of two independent stages: the stochastic model of the capital drawdowns and the stochastic model of the capital distributions over a fund's lifetime. Capital distributions are assumed to follow lognormal distributions in our approach. A mean-reverting square-root process is applied to model the rate at which capital is drawn over time. Applying equilibrium intertemporal asset pricing consideration, we are able to derive closed-form solutions for the market value and time-weighted model returns of a private equity fund.

Keywords: Private Equity Funds; Stochastic Modeling; Mean-Reverting Square-Root Process; Incomplete Markets (search for similar items in EconPapers)
JEL-codes: D52 G13 G24 (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cefswp:200602

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