Performance Measurement in Private Equity: Another Look at the Lagged Beta Effect

Abstract

We continue the analysis of lagged betas associated with Private Equity returns that we began in 2002. We extend the research on this topic along two dimensions. First, we conduct an empirical test to determine whether the adoption of FAS 157/ASC 820, Fair Value Accounting, has had an impact on the lagged beta effect associated with private equity returns. We conclude that the new accounting rules have had no impact on the amount of lagged beta associated with private equity returns. In addition, we find that the behavioral element previously documented with private equity returns remains intact post-FAS 157 adoption. Last, we apply public stock market indices that specifically incorporate the Fama and French style effects of size and value into the index construction to see which, if any, have a greater impact on measuring the lagged beta effect associated with private equity returns. We conclude that the Growth style effect has a significant impact on lagged private equity beta, but that there is less conclusive evidence regarding the Size effect.