The Alpha and Beta of Private Equity Investments

Abstract

This paper introduces a novel methodology to estimate abnormal performance and systematic risk of private equity from observable cash flows. The methodology is validated using Monte-Carlo simulations and is applied to a unique sample of 10,798 portfolio company investments by private equity funds. The results show that both venture capital and buyout investments have substantial loadings on the market factor and earn statistically significant positive abnormal returns before fees. The paper also provides the first comprehensive analysis of the differences in systematic risk and abnormal returns across time periods, exit routes, regions, industries, and across companies in different development stages.

Keywords: private equity, venture capital, abnormal return, systematic risk

JEL Classification: C51, G12, G23, G24