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Annual Review of Financial Economics

Volume 11, 2019

Risk Adjustment in Private Equity Returns

Abstract

This article reviews empirical methods to assess risk and return in private equity. I discuss data and econometric issues for fund-level, deal-level, and publicly traded partnerships data. Risk-adjusted return estimates vary substantially by method, time period, and data source. The weight of evidence suggests that, relative to a similarly risky investment in the stock market, the average venture capital (VC) fund earned positive risk-adjusted returns before the turn of the millennium, but net-of-fee returns have been zero or even negative since. Average leveraged buyout (BO) investments have generally earned positive risk-adjusted returns both before and after fees, compared with a levered stock portfolio. Based on an expanded set of risk factors from the literature, VC resembles a small-growth investment, while BO loads mostly on value. I also discuss the empirical evidence on liquidity and idiosyncratic volatility risks.

Keyword(s): leveraged buyout, performance measurement, private equity, return, risk, venture capital
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2019-12-26
2024-05-01
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/content/journals/10.1146/annurev-financial-110118-123057
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Risk Adjustment in Private Equity Returns
Annual Review of Financial Economics 11, 131 (2019); https://doi.org/10.1146/annurev-financial-110118-123057
/content/journals/10.1146/annurev-financial-110118-123057
/content/journals/10.1146/annurev-financial-110118-123057
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