Cyclicality, Performance Measurement, and Cash Flow Liquidity in Private Equity

Abstract

Public and private equity waves move together. Using quarterly cash-flow data for a large sample of venture capital and buyout funds from 1984-2010, we investigate the implications of this co-cyclicality for understanding private equity cash flows and performance. In the cross-section, varying the beta used to assess relative performance has a large effect on inference near a beta of zero, but only a modest effect for more reasonable beta estimates. A similar message comes through in the time series. Though funds raised in hot markets underperform in absolute terms, this underperformance is sharply reduced by a comparison to the S&P 500, and disappears entirely at the levels of beta recently estimated in the literature. These findings imply that high private equity fundraising forecasts both low private equity cash flows and low market returns, suggesting a positive correlation between private equity net cash flows and public equity valuations. Examining cash flows directly, we find that this is indeed the case. While both capital calls and distributions rise with public equity valuations, distributions are more sensitive than calls. Net cash flows are therefore procyclical and private equity funds are liquidity providers (sinks) when market valuations are high (low). Venture cash flows and performance are considerably more procyclical than buyout. Debt market conditions also have a significant impact on private equity cash flows. At the same time, most cash-flow variation is idiosyncratic across funds, and most predictable variation is explained by the age of the fund.

Risk‐Adjusting the Returns to Venture Capital

“…This PME is not statistically significantly different from zero though, as indicated by the p ‐value of the J ‐test. As with IRR and TVPI, the literature reports a wide range of average PMEs (bearing in mind that a PME of zero in our method corresponds to a traditional PME of one): Kaplan and Schoar () report 0.96, Robinson and Sensoy () find 1.06 (1.03 for fully liquidated funds), and Harris, Jenkinson, and Kaplan () 1.36. The latter number is from the most comprehensive and likely most representative sample of VC funds in the literature.…”

“…For comparison, Ljungqvist and Richardson (), Kaplan and Schoar (), Woodward (), Robinson and Sensoy (), Stucke (), and Ewens, Jones, and Rhodes‐Kropf () report VC fund returns that are equal to or slightly above the return on the market portfolio. Conversely, Phalippou and Zollo (), Phalippou and Gottschalg (), and Driessen, Lin, and Phalippou () find below‐market returns.…”

Market-Timing and Agency Costs: Evidence from Private Equity

“…16 I functionally transform both dependent variables to insure that any simulated stopping-time is positive while simulated Rush is between zero and one. 17 I consolidate the buckets as described in A.2 to have at least 9 funds sharing the same vintage-industry dummy.18 Follow-on w/n 6 qtrs=1 means that as of the stopping-time, the GPs are likely on a eventually successful road show.19 This is very much in-line with findings inRobinson and Sensoy (2011) that fund age and calendar time(quarterly) fixed effects explain less than 8% of the aggregate private equity cash-flow variation.…”

“… See Korteweg and Nagel (2013) and Sørensen and Jagannathan (2013) for details Robinson and Sensoy (2011). provide empirical assessment of the question by examining sensitivity of cross-sectional mean PME to different beta/benchmark assumption).5 Since TTR is limited by the benchmark volatility over the period, Sharpe-ratios may be more comparable across time and industries.…”

“…provide empirical assessment of the question by examining sensitivity of cross-sectional mean PME to different beta/benchmark assumption).5 Since TTR is limited by the benchmark volatility over the period, Sharpe-ratios may be more comparable across time and industries. 6 See, for example,Kaplan and Schoar (2005),Robinson and Sensoy (2011).…”