Risk and Expected Returns of Private Equity Investments : Evidence Based on Market Prices

We estimate the risk and expected returns of private equity using market prices of publicly traded funds of funds holding unlisted private equity funds and publicly traded private equity funds participating directly in private equity transactions. Based on the performance of these two types of listed vehicles, private equity has a market loading close to one and a significantly positive loading on the Fama-French SMB factor. Private equity performance is also negatively related to the credit spread in addition to the substantial exposure to stock market risk. The performance for listed vehicles exhibits greater systematic risk than the private equity performance index, an index based on the self-reported net asset value of unlisted private equity funds, because this index does not reflect market valuation changes in a timely manner. Finally, we find that the market expects unlisted private equity funds to earn annual abnormal returns between -0.5% and 2%