Risk-Adjusted Returns of Private Equity Funds: A New Approach

58 Pages Posted: 20 Jul 2022

See all articles by Arthur G. Korteweg

Arthur G. Korteweg

University of Southern California - Marshall School of Business

Stefan Nagel

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 8, 2022

Abstract

This paper introduces a new metric, alpha, to benchmark the performance of individual private equity funds. Our metric is substantially less sensitive to noise in fund cash flows compared to the popular public market equivalent (PME) and its generalization (GPME), while having the same aggregate pricing implications as GPME. For a large data set of fund cash flows, the standard deviation of alpha across venture capital funds is 20% lower than (G)PME. For buyout, PME and alpha are close, but deviate in certain subsamples. Using alpha increases power in regressions involving fund performance and improves performance predictability of future funds.

Keywords: private equity, venture capital, buyout, performance, return, risk-adjusted return, risk-adjustment, beta, predictability

Suggested Citation

Korteweg, Arthur G. and Nagel, Stefan, Risk-Adjusted Returns of Private Equity Funds: A New Approach (July 8, 2022). Available at SSRN: https://ssrn.com/abstract=4157952 or http://dx.doi.org/10.2139/ssrn.4157952

Arthur G. Korteweg (Contact Author)

University of Southern California - Marshall School of Business ( email )

3670 Trousdale Parkway
Los Angeles, CA 90089
United States

HOME PAGE: http://www.marshall.usc.edu/personnel/arthur-korteweg

Stefan Nagel

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research ( email )

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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