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Phalippou, Ludovic --- "Private Equity Funds’ Performance, Risk and Selection" [2012] ELECD 239; in Athanassiou, Phoebus (ed), "Research Handbook on Hedge Funds, Private Equity and Alternative Investments" (Edward Elgar Publishing, 2012)

Book Title: Research Handbook on Hedge Funds, Private Equity and Alternative Investments

Editor(s): Athanassiou, Phoebus

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781849802789

Section: Chapter 4

Section Title: Private Equity Funds’ Performance, Risk and Selection

Author(s): Phalippou, Ludovic

Number of pages: 26

Extract:

4. Private equity funds' performance, risk
and selection
Ludovic Phalippou*


INTRODUCTION

The purpose of this chapter is to assess the risks and returns of private
equity funds, based on the different datasets used in the literature and to
point out some issues in fund selection.
This chapter is divided into two main sections, namely private equity
fund risk and return; and private equity fund selection. The first section
provides an overview of the academic evidence on the risk and return of
investing in private equity funds (buyout and venture capital). We find
that the average private equity fund return is comparable or inferior to
that of public equity, a finding that is in contrast to what industry asso-
ciations report. We show that differences in methodology may explain,
in part, this paradox. We also find that venture capital funds have
market betas of 2.7, whilst buyout funds have lower market betas (1.3).
Estimates of cost of capital are around 15 per cent (in excess of risk-free
rate) for both buyout and venture capital funds. The second section is
dedicated to fund selection. Years of large capital inflows from inves-
tors have poorer returns. New evidence on performance persistence is
presented, showing that investors may have difficulties exploiting return
persistence as this is too short-lived. Finally we report that the most
important explanatory variable for the cross-section of buyout returns
is the number of investments a private equity firm is holding at the same
time.
In ...


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