Discount Rate Risk in Private Equity: Evidence from Secondary Market Transactions
Fisher College of Business Working Paper No. 2021-03-004
Charles A. Dice Center Working Paper No. 2021-04
61 Pages Posted: 12 Apr 2021
There are 3 versions of this paper
Discount-Rate Risk in Private Equity: Evidence from Secondary Market Transactions
Discount Rate Risk in Private Equity: Evidence from Secondary Market Transactions
Discount Rate Risk in Private Equity: Evidence from Secondary Market Transactions
Date Written: April 8, 2021
Abstract
Standard measures of PE performance based on cash flows overlook discount rate risk. An index constructed from prices paid in secondary market transactions indicates that PE discount rates vary considerably. While the standard alpha for our index is zero, measures of performance based on cash flow data for funds in our index are large and positive. To illustrate that results are not driven by idiosyncrasies of PE secondary markets, we obtain similar results using cash flows and returns of synthetic funds that invest in small cap stocks. Ignoring variation in PE discount rates can lead to a misallocation of capital.
Keywords: Private Equity, Secondary Market for Private Equity Funds, Market Index
JEL Classification: G11, G23, G24
Suggested Citation: Suggested Citation