How much for a haircut? Illiquidity, secondary markets, and the value of private equity

Autor: Nicolas P. B. Bollen, Berk A. Sensoy
Rok vydání: 2021
Předmět:
Zdroj: Financial Management. 51:501-538
ISSN: 1755-053X
0046-3892
Popis: Limited partners (LPs) of private equity funds commit to invest with significant uncertainty regarding the timing of capital calls and payoffs and extreme restrictions on liquidity. Secondary markets have emerged which alleviate some of the associated cost. This paper develops a subjective valuation model that incorporates these institutional features. For a risk-averse LP private equity values are highly sensitive to the time-varying discount observed in secondary market transactions. Model-implied breakeven returns generally exceed empirically observed returns. Only for highly risk-tolerant LPs who can access above-average funds and an efficient secondary market are the costs of private equity justified by performance. Preliminary; please do not circulate *Corresponding author. Contact information: Nicolas P.B. Bollen, The Owen Graduate School of Management, Vanderbilt University, 401 21 Avenue South, Nashville, TN 37203, Telephone: 615-343-5029, Email: nick.bollen@owen.vanderbilt.edu. Berk A. Sensoy, Department of Finance, Fisher College of Business, Ohio State University, Columbus, OH 43210, Telephone: 614-292-3217, email: sensoy.4@osu.edu. For helpful comments and discussions, we thank Nick Crain and seminar participants at Boston College, University of Michigan, University of Utah, and Vanderbilt University. This research is supported by the Financial Markets Research Center at Vanderbilt University and The Risk Institute at the Fisher College of Business, Ohio State University.
Databáze: OpenAIRE
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