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Journals
Discount‐rate Risk in Private Equity: Evidence From Secondary Market Transactions
Resource type
Authors/contributors
- Boyer, Brian H. (Author)
- Nadauld, Taylor D. (Author)
- Vorkink, Keith P. (Author)
- Weisbach, Michael S. (Author)
Title
Discount‐rate Risk in Private Equity: Evidence From Secondary Market Transactions
Abstract
Measures of private equity (PE) performance based on cash flows do not account for a discount‐rate risk premium that is a component of the capital asset pricing model (CAPM) alpha. We create secondary market PE indices and find that PE discount rates vary considerably. Net asset values are too smooth because they fail to reflect variation in discount rates. Although the CAPM alpha for our index is zero, the generalized public market equivalent based on cash flows is large and positive. We obtain similar results for a set of synthetic funds that invest in small cap stocks. Ignoring variation in PE discount rates can lead to a misallocation of capital.
Publication
The Journal of Finance
Volume
78
Issue
2
Pages
835-885
Date
2023
Citation
Boyer, B. H., Nadauld, T. D., Vorkink, K. P., & Weisbach, M. S. (2023). Discount‐rate Risk in Private Equity: Evidence From Secondary Market Transactions. The Journal of Finance, 78, 835–885.
Journals
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