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The Return to Direct Investment in Private Firms: New Evidence on the Private Equity Premium Puzzle *

The Return to Direct Investment in Private Firms: New Evidence on the Private Equity Premium... This paper uses a novel dataset to analyze the return to direct investments in private firms by pension funds. We have two key findings. First, direct investments in private firms have underperformed public equity by 392 basis points per annum under conservative risk adjustments. Second, initial mispricing, due to over‐optimism or misperceived risk, and subsequent low capital gains seem to explain the gap in returns to private firms. Overall, these findings complement the finding of of low returns on entrepreneurial investments and provide new insight into the existence of what they call the private equity premium puzzle: Even professional investors with well‐diversified portfolios like pension funds seem to get a poor risk‐return tradeoff from investing directly in private firms. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png European Financial Management Wiley

The Return to Direct Investment in Private Firms: New Evidence on the Private Equity Premium Puzzle *

European Financial Management , Volume 17 (3) – Jun 1, 2011

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References (44)

Publisher
Wiley
Copyright
© 2010 Blackwell Publishing Ltd
ISSN
1354-7798
eISSN
1468-036X
DOI
10.1111/j.1468-036X.2010.00562.x
Publisher site
See Article on Publisher Site

Abstract

This paper uses a novel dataset to analyze the return to direct investments in private firms by pension funds. We have two key findings. First, direct investments in private firms have underperformed public equity by 392 basis points per annum under conservative risk adjustments. Second, initial mispricing, due to over‐optimism or misperceived risk, and subsequent low capital gains seem to explain the gap in returns to private firms. Overall, these findings complement the finding of of low returns on entrepreneurial investments and provide new insight into the existence of what they call the private equity premium puzzle: Even professional investors with well‐diversified portfolios like pension funds seem to get a poor risk‐return tradeoff from investing directly in private firms.

Journal

European Financial ManagementWiley

Published: Jun 1, 2011

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