Valuing Private Equity Investments Strip by Strip
- Working Paper
We propose a new valuation method for private equity investments. It constructs a replicating portfolio using cash-flows on various listed equity and fixed income instruments (strips). It then values the listed strips using an asset pricing model that accurately captures the risk in the cross-section of bonds and equity factors. The method delivers a risk-adjusted profit on each PE investment and a time series for the expected return on each fund category. Applying the method to the universe of PE funds, we find negative risk-adjusted profits for the average fund, substantial heterogeneity and some persistence in performance. Expected returns and risk-adjusted profit decline in the later part of the sample.
Arpit Gupta, NYU Stern School of Business
Stijn Van Nieuwerburgh, NYU