Risk and Expected Returns of Private Equity Investments: Evidence Based on Market Prices
We estimate the risk and expected returns of private equity investments based on the market prices of exchange-traded funds of funds that invest in unlisted private equity funds. Our results indicate that the market expects unlisted private equity funds to earn abnormal returns of approximately 1% per year. We also find that the market expects listed private equity funds to earn zero or marginally negative abnormal returns net of fees. Both listed and unlisted private equity funds have market betas close to one and positive factor loadings on the Fama-French SMB factor. Private equity fund returns are positively related to GDP growth and negatively related to the credit spread. In addition, we find that market returns of exchange traded funds of funds and listed private equity funds predict changes in self-reported book values of unlisted private equity funds.
We thank Steven Kaplan, Per Stromberg, and seminar participants at Stern School of Business, New York University, and Cornell University. We gratefully acknowledge financial support from Inquire UK and Inquire Europe. All errors remain our own. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Narasimhan Jegadeesh & Roman Kräussl & Joshua M. Pollet, 2015. "Risk and Expected Returns of Private Equity Investments: Evidence Based on Market Prices," Review of Financial Studies, Society for Financial Studies, vol. 28(12), pages 3269-3302. citation courtesy of