Evaluating Private Equity Performance Using Stochastic Discount Factors

Oleg Gredil, Morten Sørensen, William Waller

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

We examine the performance of 2,750 private equity funds incepted during 1979-2008 using the discount factors implied by the two leading consumption-based asset pricing models (CBAPMs): Habit Formation and Long-run Risks. Our approach is motivated by the observation that investment mandates and cash flow patterns of university endowments and public pension funds are strongly consistent with the preferences of a representative investor in those models. Under these discount factors, venture capital did not destroy value in post-2000 vintages and has outperformed buyouts and generalists in the full sample, in contrast to CAPM-based evidence. Also we find that 2007-08 venture vintages has been on track to provide a relatively good hedge for consumption shocks during and post crisis in comparison to buyout funds. Moreover, there is virtually no spike in private equity excess returns in late 90s according to CBAPMs.
Original languageEnglish
Publication date2019
Number of pages31
Publication statusPublished - 2019
EventMidwest Finance Association 2019 Annual Meeting - Radisson Blu Aqua Hotel, Chicago, United States
Duration: 7 Mar 20199 Mar 2019
Conference number: 68
https://www.openconf.org/MidwestFinance2019/modules/request.php?module=oc_program&action=program.php&p=program

Conference

ConferenceMidwest Finance Association 2019 Annual Meeting
Number68
LocationRadisson Blu Aqua Hotel
CountryUnited States
CityChicago
Period07/03/201909/03/2019
Internet address

Keywords

  • Private equity
  • Venture capital
  • Institutional investors
  • Consumption-based asset pricing
  • University endowments
  • Pension plans

Cite this

Gredil, O., Sørensen, M., & Waller, W. (2019). Evaluating Private Equity Performance Using Stochastic Discount Factors. Paper presented at Midwest Finance Association 2019 Annual Meeting , Chicago, United States.
Gredil, Oleg ; Sørensen, Morten ; Waller, William. / Evaluating Private Equity Performance Using Stochastic Discount Factors. Paper presented at Midwest Finance Association 2019 Annual Meeting , Chicago, United States.31 p.
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Gredil, O, Sørensen, M & Waller, W 2019, 'Evaluating Private Equity Performance Using Stochastic Discount Factors' Paper presented at, Chicago, United States, 07/03/2019 - 09/03/2019, .

Evaluating Private Equity Performance Using Stochastic Discount Factors. / Gredil, Oleg; Sørensen, Morten; Waller, William.

2019. Paper presented at Midwest Finance Association 2019 Annual Meeting , Chicago, United States.

Research output: Contribution to conferencePaperResearchpeer-review

TY - CONF

T1 - Evaluating Private Equity Performance Using Stochastic Discount Factors

AU - Gredil, Oleg

AU - Sørensen, Morten

AU - Waller, William

PY - 2019

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N2 - We examine the performance of 2,750 private equity funds incepted during 1979-2008 using the discount factors implied by the two leading consumption-based asset pricing models (CBAPMs): Habit Formation and Long-run Risks. Our approach is motivated by the observation that investment mandates and cash flow patterns of university endowments and public pension funds are strongly consistent with the preferences of a representative investor in those models. Under these discount factors, venture capital did not destroy value in post-2000 vintages and has outperformed buyouts and generalists in the full sample, in contrast to CAPM-based evidence. Also we find that 2007-08 venture vintages has been on track to provide a relatively good hedge for consumption shocks during and post crisis in comparison to buyout funds. Moreover, there is virtually no spike in private equity excess returns in late 90s according to CBAPMs.

AB - We examine the performance of 2,750 private equity funds incepted during 1979-2008 using the discount factors implied by the two leading consumption-based asset pricing models (CBAPMs): Habit Formation and Long-run Risks. Our approach is motivated by the observation that investment mandates and cash flow patterns of university endowments and public pension funds are strongly consistent with the preferences of a representative investor in those models. Under these discount factors, venture capital did not destroy value in post-2000 vintages and has outperformed buyouts and generalists in the full sample, in contrast to CAPM-based evidence. Also we find that 2007-08 venture vintages has been on track to provide a relatively good hedge for consumption shocks during and post crisis in comparison to buyout funds. Moreover, there is virtually no spike in private equity excess returns in late 90s according to CBAPMs.

KW - Private equity

KW - Venture capital

KW - Institutional investors

KW - Consumption-based asset pricing

KW - University endowments

KW - Pension plans

KW - Private equity

KW - Venture capital

KW - Institutional investors

KW - Consumption-based asset pricing

KW - University endowments

KW - Pension plans

M3 - Paper

ER -

Gredil O, Sørensen M, Waller W. Evaluating Private Equity Performance Using Stochastic Discount Factors. 2019. Paper presented at Midwest Finance Association 2019 Annual Meeting , Chicago, United States.