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Private Equity Performance Measurement Essay

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Fisher College of Business Working Paper Series

Charles A. Dice Center for Research in Financial Economics
Cyclicality, Performance Measurement, and Cash Flow Liquidity in Private Equity

David T. Robinson, Duke University, NBER, and SIFR Berk A. Sensoy, Department of Finance, The Ohio State University

Dice Center WP 2010-021
Fisher College of Business WP 2011-03-021

Revision date: September 2011 Original date: December 2010

This paper can be downloaded without charge from: http://www.ssrn.com/abstract=1731603 An index to the working paper in the Fisher College of Business Working Paper Series is located at: http://www.ssrn.com/link/Fisher-College-of-Business.html

Electronic copy available at: http://ssrn.com/abstract=1731603

Cyclicality, Performance Measurement, and Cash Flow Liquidity in Private Equity∗
David T. Robinson Duke University and NBER Berk A. Sensoy Ohio State University

September 8, 2011

Abstract Public and private equity waves move together. Using quarterly cash flow data for a large sample of venture capital and buyout funds from 1984-2010, we investigate the implications of this co-cyclicality for understanding private equity cash flows and performance. In the cross-section, varying the beta used to assess relative performance has a large effect near a beta of zero, but only a modest effect for more reasonable beta estimates. For instance, buyout funds outperform the S&P 500 by 18% over the life of the fund, and moving to a beta of 1.5 only reduces this to 12%. A similar message comes through in the time series. Though funds raised in hot markets underperform in absolute terms, this underperformance is sharply reduced by a comparison to the S&P 500, and disappears entirely at the levels of beta recently estimated in the literature. These findings imply that high private equity fundraising forecasts both low private equity cash flows and low market returns, suggesting a positive correlation between private...

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