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Risk-adjusting the returns of private equity using the CAPM and multi-factor extensions

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  • Buchner, Axel

Abstract

This paper develops a novel Public Market Equivalent (PME) measure to evaluate the risk-adjusted performance of private equity investments using the standard CAPM and multi-factor extensions. Using a comprehensive sample of 7732 fully realized venture capital investments, the paper estimates PMEs using the standard CAPM, the Fama–French three-factor model, and a four-factor model that also includes the Pastor–Stambaugh traded liquidity factor. The results highlight that venture capital investments substantially outperform traded stocks and that their returns resemble those of small growth stocks. Additionally, the results show that the exposure of venture capital returns to the traded liquidity factor is negligible.

Suggested Citation

  • Buchner, Axel, 2016. "Risk-adjusting the returns of private equity using the CAPM and multi-factor extensions," Finance Research Letters, Elsevier, vol. 16(C), pages 154-161.
    • Handle: RePEc:eee:finlet:v:16:y:2016:i:c:p:154-161
    DOI: 10.1016/j.frl.2015.10.023
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    References listed on IDEAS

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    1. Steven N. Kaplan & Antoinette Schoar, 2005. "Private Equity Performance: Returns, Persistence, and Capital Flows," Journal of Finance, American Finance Association, vol. 60(4), pages 1791-1823, August.
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    9. Arthur Korteweg & Morten Sorensen, 2010. "Risk and Return Characteristics of Venture Capital-Backed Entrepreneurial Companies," The Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3738-3772, October.
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    Cited by:

    1. Cumming, Douglas & Zhang, Yelin, 2016. "Alternative investments in emerging markets: A review and new trends," Emerging Markets Review, Elsevier, vol. 29(C), pages 1-23.

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    More about this item

    Keywords

    Venture capital; Public Market Equivalent; CAPM; Multi-factor models;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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