Private Equity Net Asset Values and Future Cash Flows

This paper analyzes whether fund valuations produced by private equity managers are biased predictors of future discounted cash flows (DCF). Our research is based on an extensive set of timed cash flows and reported net asset values (NAVs) that relates to 483 funds spanning 1988-2011. Using an ex ante lens, we find that, on average, reported NAVs converge on the future DCF early in the life of the fund. This result is particularly interesting to investors for whom unbiased asset valuations are important in keeping portfolios optimally allocated. In addition, findings indicate that although NAVs generally are more conservative in the first half of our sample period, NAVs for venture capital funds tend to overstate economic value after 1999 following the bursting of the tech bubble. We also find some evidence that private equity managers of funds that perform less well use their discretion over asset valuations to keep asset values high during fundraising periods, as well as at the end of the fund life, which can result in higher management fees.