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How Much for a Haircut? Illiquidity, Secondary Markets, and the Value of Private Equity

Author

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  • Bollen, Nicolas P. B.

    (Vanderbilt University)

  • Sensoy, Berk A.

    (OH State University)

Abstract

Limited partners (LPs) of private equity funds commit to invest with significant uncertainty regarding the timing of capital calls and payoffs and extreme restrictions on liquidity. Secondary markets have emerged which alleviate some of the associated cost. This paper develops a subjective valuation model incorporating these institutional features. Private equity values are sensitive to the discount in secondary market transactions, especially for more risk averse LPs. Model-implied breakeven returns generally exceed empirically observed returns. However, highly risk tolerant LPs may find private equity attractive at portfolio allocations observed in practice, especially if they can access above-average funds and an efficient secondary market.

Suggested Citation

  • Bollen, Nicolas P. B. & Sensoy, Berk A., 2015. "How Much for a Haircut? Illiquidity, Secondary Markets, and the Value of Private Equity," Working Paper Series 2015-08, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2015-08
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    Cited by:

    1. Nadauld, Taylor D. & Sensoy, Berk A. & Vorkink, Keith & Weisbach, Michael S., 2019. "The liquidity cost of private equity investments: Evidence from secondary market transactions," Journal of Financial Economics, Elsevier, vol. 132(3), pages 158-181.
    2. Daniel Dimitrov, 2022. "Intergenerational Risk Sharing with Market Liquidity Risk," Tinbergen Institute Discussion Papers 22-028/VI, Tinbergen Institute.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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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