NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Valuing Private Equity

Morten Sorensen, Neng Wang, Jinqiang Yang

NBER Working Paper No. 19612
Issued in November 2013
NBER Program(s):   AP   CF

We investigate whether the performance of Private Equity (PE) investments is sufficient to compensate investors (LPs) for risk, long-term illiquidity, management and incentive fees charged by the general partner (GP). We analyze the LP's portfolio-choice problem and find that management fees, carried interest and illiquidity are costly, and GPs must generate substantial alpha to compensate LPs for bearing these costs. Debt is cheap and reduces these costs, potentially explaining the high leverage of buyout transactions. Conventional interpretations of PE performance measures appear optimistic. On average, LPs may just break even, net of management fees, carry, risk, and costs of illiquidity.

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Document Object Identifier (DOI): 10.3386/w19612

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