FIN-03-001 |
NYU Stern School of Business |
January 2003
Alexander Ljungqvist and Matthew Richardson
ABSTRACT
Using a unique dataset of private equity funds over the last two decades, this paper analyzes the
cash flow, return, and risk characteristics of private equity. Unlike previous studies, we have
detailed cash flow data for each fund, rather than aggregate or accounting returns. We also know
the exact timing of investments and capital returns to investors and the number and types of
companies each fund invested in. We document the draw down and capital return schedules for
the typical private equity fund, and show that it takes several years for capital to be invested, and
over ten years for capital to be returned to generate excess returns. We provide several
determining factors for these schedules, including existing investment opportunities and
competition amongst private equity funds. In terms of performance, we document that private
equity generates excess returns on the order of five to eight percent per annum relative to the
aggregate public equity market. Moreover, while we estimate the betas of the private equity
funds’ portfolios to be greater than one, we show that on a risk-adjusted basis the excess value of
the typical private equity fund is on the order of 24 percent relative to the present value of the
invested capital. One interpretation of this magnitude is that it represents compensation for
holding a 10-year illiquid investment.
Alexander Ljungqvist
Institution: Stern School of Business, New York University
Phone: (212) 998-0304
Fax: (212) 995-4233
Email: aljungqv@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~aljungqv
Matthew Richardson
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Fax: (212) 995-4233
Email: mrichar0@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~mrichar0
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