Emory University, Goizueta Business School

Emory University, Goizueta Business School Emory University, Goizueta Business School

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Risk and returns for private equity and venture capital funds

Risk and returns for private equity and venture capital funds 2018-07-25
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Narasimhan Jegadeesh

The early success of some well-known private equity and venture capital funds has led to their rapid growth. According to research from Narasimhan Jegadeesh, the Dean’s Distinguished Chair in Finance, Roman Kraussl (U of Luxembourg), and Joshua M. Pollet (U of Illinois), investors should carefully evaluate the future risk and return potential of this asset class and avoid investing primarily because of past successes. Some private equity indices compiled by the industry suggest that these funds offer bigger returns than the public equity market, but prior academic studies offer mixed evidence on performance. Jegadeesh and his coauthors devised a new approach to determine the actual risk and returns by using market prices of funds that primarily invest in unlisted PE and VC funds listed on several European stock exchanges. This approach has a distinct advantage because it uses publicly available market prices rather than self-reported data, which were previously used in other academic studies. Their findings indicate that unlisted PE and VC funds as an asset class are unlikely to yield extraordinary returns as suggested by some self-reported data. They may even yield about the same return as the stock market but are illiquid.

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Risk and Expected Returns of Private Equity Investments: Evidence Based on Market Prices

We estimate the risk and expected returns of private equity investments based on the market prices of exchange-traded funds of funds that invest in unlisted private equity funds.

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