The Risk and Return of Private Equity Using Market Prices

Abstract

Drawing on a unique and comprehensive data set that includes more than 700 listed private equity companies (LPEs), we analyze the historical risk profile of these investment vehicles from 1994 until 2008. We find that a return index of LPEs has similar risk properties compared to a return index of listed private equity fund of funds. Both of these indices indicate that the private equity (PE) asset class suffers from substantial exposure to stock market risk as well as other measures of macroeconomic activity. In contrast with previous studies, our analysis uses the market price as an objective measure of per share value, and therefore, it does not need to rely on the self-reported internal rate of return or net asset value imputed for assets that are inherently difficult to appraise to calculate the return for the private equity companies. In a cross-sectional analysis we also investigate the influence of organizational structure, size, experience, listing exchange, financing stage, geographic positioning, and industry focus on the fund discount (NAV/Price).