Discount Rate Risk in Private Equity: Evidence from Secondary Market Transactions
Standard measures of private equity performance based on cash flows overlook discount rate risk. An index constructed from prices paid in secondary market transactions indicates that private equity discount rates vary considerably. While the standard alpha for our index is zero, measures of performance based on cash flow data for funds in our index are large and positive. To illustrate that results are not driven by idiosyncrasies of private equity secondary markets, we obtain similar results using cash flows and returns of synthetic funds that invest in small cap stocks. Ignoring variation in PE discount rates can lead to a misallocation of capital.
Published Versions
BRIAN H. BOYER & TAYLOR D. NADAULD & KEITH P. VORKINK & MICHAEL S. WEISBACH, 2023. "Discount‐Rate Risk in Private Equity: Evidence from Secondary Market Transactions," The Journal of Finance, vol 78(2), pages 835-885.