Abstract
Whether returns of venture capital and private equity investments exhibit fat tails, particularly in the upper tail, affects how entrepreneurs and investors view the attractiveness of such investments. Using fund performance data, we propose and test a random growth model with a random initial valuation of funds to explain the observed distribution of funds’ residual-value and payout multiples. This model endogenously generates power-law tails in the cross-section from a log-normally distributed diffusion process and log-normally distributed birth valuation. We find that the resulting smooth double Pareto distribution fits the data better than competing log-normal or double Pareto models and generally performs well, apart from a small region around a valuation multiple of one. The divergence of the fitted distribution from the empirical one can be explained by an excess number of funds without distributions to investors – funds that may not have made or revalued any investments yet.
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
