Working Paper: NBER ID: w28691
Authors: Brian Boyer; Taylor D. Nadauld; Keith P. Vorkink; Michael S. Weisbach
Abstract: Standard measures of private equity performance based on cash flows overlook discount rate risk. An index constructed from prices paid in secondary market transactions indicates that private equity discount rates vary considerably. While the standard alpha for our index is zero, measures of performance based on cash flow data for funds in our index are large and positive. To illustrate that results are not driven by idiosyncrasies of private equity secondary markets, we obtain similar results using cash flows and returns of synthetic funds that invest in small cap stocks. Ignoring variation in PE discount rates can lead to a misallocation of capital.
Keywords: Private Equity; Discount Rate; Performance Measures
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 |
|---|---|
| variation in discount rates (E43) | GPME (D58) |
| variation in discount rates (E43) | performance measures (GPME) (C52) |
| discount rates for private equity vary significantly (H43) | marginal PE investor differs from those in other asset classes (G19) |
| variation in PE discount rates (H43) | standard performance measures (CAPM alpha and beta) (G12) |
| types of investors concerned with discount rate variations (E43) | focus on cash flows rather than market prices (G19) |