Journal of Financial and Quantitative Analysis

Research Articles

A New Method to Estimate Risk and Return of Nontraded Assets from Cash Flows: The Case of Private Equity Funds

Joost Driessena1, Tse-Chun Lina2 and Ludovic Phalippoua3

a1 Faculty of Economics and Business, Tilburg University, PO Box 90153, 5000 LE, Tilburg, The Netherlands;

a2 School of Economics and Finance, University of Hong Kong, Room 928, KKL Building, Pokfulam Road, Hong Kong;

a3 Said Business School, University of Oxford, Park End Street, Oxford, OX1 1HP, UK.


We develop a new methodology to estimate abnormal performance and risk exposure of nontraded assets from cash flows. Our methodology extends the standard internal rate of return approach to a dynamic setting. The small-sample properties are validated using a simulation study. We apply the method to a sample of 958 private equity funds. For venture capital funds, we find a high market beta and underperformance before and after fees. For buyout funds, we find a relatively low market beta and no evidence for outperformance. We find that self-reported net asset values significantly overstate fund values for mature and inactive funds.

(Online publication April 20 2012)


We thank Gurdip Bakshi, Hendrik Bessembinder (the editor), Bruno Biais, Michael Brennan, Magnus Dahlquist, Thomas Dangl, Frank de Jong, Steve Kaplan, Rainer Lauterbach, André Lucas, Lubos Pástor, Tarun Ramadorai, Per Stromberg, Marno Verbeek, Annette Vissing-Jorgensen, Bas Werker, and seminar participants at Norwegian School of Economics Bergen, BI Norwegian Business School Oslo, HEC Paris, Tilburg University, University of California at Los Angeles, University of Southern California, Institute for Financial Research (SIFR), 2008 National Bureau of Economic Research meeting on private equity, the 2007 Vienna Symposia on Asset Management, the 2007 Rotterdam School of Management Conference on Asset Management, 2008 American Finance Association, 2007 European Finance Association, the 2008 National Taiwan University International Conference on Economics, Finance and Accounting conference, the 2007 European Central Bank and the Center for Financial Studies conference, and 2008 Netspar Workshop for valuable comments. We also thank Francis Longstaff (associate editor and referee) for many valuable comments. We thank Inquire-UK for financial support. Views are those of the authors and not those of Inquire-UK.