Essays on Empirical Asset Pricing and Private Equity

This thesis is the result of my PhD studies at the Department of Finance and the Pension Research Center (PeRCent) at Copenhagen Business School.
The thesis applies methods from empirical asset pricing to study the payoffs of non-traded assets, specifically private equity funds, relative to the payoffs of public market assets. Assessing the risk and return characteristics of private equity funds presents unique challenges due to the absence of quoted market prices and consequential lack of return data. This thesis addresses some of these challenges. The thesis consists of three essays, which are self-contained and can be read independently.
The first essay provides empirical evidence that the risk-adjusted value of buyout fund pay-offs decreases significantly relative to current performance measures if investors account for time-varying risk prices and interest rates. The results suggest that buyout funds do not improve the risk-return trade-off of a myopic investor with time-varying required compensation for bearing risk.
The second essay shows how a variant of the widely used Public Market Equivalent measure of risk-adjusted fund performance relates to portfolio choice problems. I use the relationship to estimate the optimal allocation between buyout funds and a benchmark of publicly traded stocks directly from fund cash flows. The empirical results show that both log-utility and power-utility investors should allocate an economically significant fraction of wealth to buyout funds.
The third essay (co-authored with Nicola Giommetti) proposes a modification to existing meth-ods for risk-adjusting private equity fund cash flows based on a decomposition of excess private equity performance. We apply and evaluate the method by studying the value of buyout, venture capital and generalist funds to CAPM and long-term investors.