Working Paper: NBER ID: w28134
Authors: Matthias Fleckenstein; Francis A. Longstaff
Abstract: We present a new approach for estimating private equity returns using secondary market prices for entrepreneurial business credit card securitizations. We show that the market requires a significantly higher premium for entrepreneurial credit risk than for household credit risk. Entrepreneurial risk is systematic in nature and has much in common with risks in corporate bond and real-estate-backed lending markets. The expected return on private equity is on the order of 14 percent and the volatility of private equity returns is comparable to that of the smallest quintile of publicly traded firms.
Keywords: Private Equity; Entrepreneurial Investment; Credit Risk
JEL Codes: G12; G5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| entrepreneurial credit risk (M13) | higher premium required for entrepreneurial credit risk (G32) |
| systematic nature of entrepreneurial risk (L26) | higher cost of capital for private equity (G32) |
| expected return on private equity (G12) | private equity premium (G12) |
| private equity returns (G12) | high volatility (C58) |
| systematic risk of entrepreneurship (L26) | similar to that of smaller publicly traded firms (G32) |
| entrepreneurial risk (L26) | correlation with macroeconomic factors (E32) |
| entrepreneurial credit risk (M13) | broader financial market dynamics (G19) |