Abstract:
Risk perception in private equity is notoriously difficult, as the cash flow patterns associated with private capital funds are not well understood on underlying asset level. To account for the incomplete information setting induced by the infrequent and imperfect valuation practice of privately held assets, this paper proposes the first reduced form model tailored for private equity fund investments. Especially their realized exit cash flows are analyzed in a joint modeling framework that describes both the exit timing and exit performance on individual deal level. The corresponding linear parametric models are estimated by means of maximum likelihood for a buy out and venture capital data set and are applied within a Monte Carlo simulation example to emphasize the superiority of our approach in the risk management context.
The working paper can be found here.
The R code used for the calculations described in the paper can be found on GitHub.
One thought on “Reduced Form Private Equity Fund Asset Modeling”
Awesome contribution to the Industry Christian. I noted you had your code on GitHub for the Reduced Form Private Equity Fund Asset Modeling but not the one at the Fund level. Would you be open to posting that?