Working Paper: NBER ID: w22404
Authors: Taylor D. Nadauld; Berk A. Sensoy; Keith Vorkink; Michael S. Weisbach
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.
Keywords: No keywords provided
JEL Codes: G11; G23; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity cost of investing in private equity (G31) | transaction costs (D23) |
| transaction costs (D23) | sellers' returns (D16) |
| timing of transactions (G14) | buyers' performance (L14) |
| buyers' liquidity provision (E41) | buyers' annualized PME (P42) |
| sellers' liquidity needs (G33) | sellers' annualized PME (P42) |
| poor economic conditions (P46) | transaction costs (D23) |
| economic downturns (F44) | asymmetry of information (D82) |
| asymmetry of information (D82) | pricing of secondary market transactions (G10) |