Valuing Private Equity

• DOI: 10.1093/rfs/hhu013
• Publication Date: 2014-06-17T10:38:39Z
• Authors: Morten Sorensen; Neng Wang; Jinqiang Yang
• Keywords: Leverage (statistics); Equity; Leveraged buyout

We investigate whether the performance of private equity (PE) investments is sufficient to compensate investors (LPs) for risk, long-term illiquidity, management, and incentive fees charged by general partner (GP). analyze LPs' portfolio-choice problem find that management fees, carried interest, illiquidity are costly, GPs must generate substantial alpha LPs bearing these costs. Debt cheap reduces costs, potentially explaining high leverage buyout transactions. Conventional interpretations PE measures appear optimistic. On average, may just break even, net carry, costs illiquidity.