The Price of Diversifiable Risk in Venture Capital and Private Equity

Ewens, Michael; Jones, Charles M.; Rhodes‐Kropf, Matthew

doi:10.1093/rfs/hht035

Cited by 115 publications

(55 citation statements)

References 48 publications

(44 reference statements)

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“…Kaplan and Schoar (2005) analyzed fund-level data and found that the net-of-fee returns of private equity funds (both venture capital and buyout) approximately equal the return on the S&P 500, whereas Ljungqvist and Richardson (2003), using a different sample, documented returns that are 5.7% higher than a simulated investment in the S&P 500 over the same time frame. Ewens, Jones, and Rhodes-Kropf (2013) used general partner value estimates (rather than realized returns) to estimate quarterly private equity returns and documented annual alphas of 4% for buyout funds. Phalippou and Gottschalg (2009) used a dataset similar to that of Kaplan and Schoar (2005) but argued that reasonable adjustments to the data to reflect the nature of reporting biases lead to lower estimates of returns.…”

Section: Performance Of Alternative Investmentsmentioning

confidence: 99%

Do (Some) University Endowments Earn Alpha?

Barber

Wang

2013

Financial Analysts Journal

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The authors analyzed the returns earned by U.S. educational endowments using style attribution models. For the average endowment, models with only public stock and bond benchmarks explain virtually all the timeseries variation in returns, yield no alpha, and generate sensible factor loadings. Elite institutions perform better than public stock and bond benchmarks because of large allocations to alternative investments. The authors found no evidence that manager selection, market timing, and tactical asset allocation generate alpha. E ducational institutions hold billions of dollars in endowment funds. As of June 2011, the top five educational endowments (Harvard University, Yale University, Stanford University, Princeton University, and the University of Texas) managed a total of $102 billion and all educational endowments in the United States and Canada collectively managed in excess of $408 billion. 1 These funds are often critical to the finances of educational institutions, but we know very little about the performance of endowments. Our lack of knowledge regarding their performance, largely a result of the limited availability of data, is remarkable given the legendary performance of some institutions, most notably the Yale endowment. David Swensen, the long-time manager of the Yale endowment, has long advocated the so-called endowment model 2 of investing popularized in his book Pioneering Portfolio Management (2009). Following the principles that he espouses, the Yale endowment earned double-digit returns for over a decade, through 2008, before dropping by 24.5% for the year ending June 2009, which placed Yale in the bottom decile of endowment performance.Yale is not the only elite institution that was hit hard by the market woes of 2009. Harvard and Stanford also saw the value of their endowments drop by more than 20%. Many universities, including such elite institutions as Princeton and Harvard, that rely heavily on endowment funding for ongoing operational expenses were forced to slash spending in the wake of steep losses. 3 The losses incurred by endowments in 2009 caused plan sponsors to question their ability to deliver superior returns using the endowment model.In this article, we shed light on the strong returns (and sharp correction) experienced by many endowments. We analyzed endowment returns for a large set of institutions over the 21 years ending in June 2011 and addressed three questions: (1) Does the average endowment earn an abnormal return (alpha) relative to standard benchmarks? (2) Do elite institutions earn alpha? (3) Is there evidence of performance persistence in endowment returns?To answer these questions, we used simple assetclass attribution models pioneered by Sharpe (1992). The intercepts from these models can be interpreted as the additional return earned by endowment funds relative to the best-fit replicating portfolio. We began the analysis with simple two-and three-factor attribution models. The two-factor model uses benchmarks for publicly traded U.S. stocks (S&P 500 Index...

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Section: Performance Of Alternative Investmentsmentioning

confidence: 99%

Do (Some) University Endowments Earn Alpha?

Barber

Wang

2013

Financial Analysts Journal

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“…Ewens et al () examine US data from 1980 to 2007 and find that the betas of VC and BO are 1.24 and 0.72, respectively. Ljungqvist and Richardson () analyse portfolio companies and report that BO's portfolio beta average is 1.08, while the VC's average beta is 1.12.…”

Section: Discussionmentioning

confidence: 99%

Optimal ownership structure in private equity

Liu

Yang

2017

Euro Fin Management

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We develop a tractable model to analyse the valuation of a general partner (GP) and the ownership allocation in a private equity (PE) fund. Our results indicate that holding ownership will increase GP's value. We further explore the influential factors that affect GP's optimal ownership decision. Our model predicts that GP's managerial skill has positive effects on GP's shareholding choice. Factors such as leverage, unspanned risks, GP's compensation have negative impacts on GP ownership decision. The fund's maturity has a non-monotonic and concave influence.Moreover, the widely used performance measures implied by our model are consistent with empirical findings.

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“…The volatility of private equity during the 1994–2012 period is 24.4%, which is above the stock market volatility of 19.0% over the 1926–2012 period – which is expected since private equity funds typically hold non‐diversified portfolios with high idiosyncratic volatility (cf. Ewens, Jones, & Rhodes‐Kropf, ).…”

Section: Datamentioning

confidence: 99%

Investment beliefs of endowments

Ang

Ayala²,

Goetzmann

2018

Euro Fin Management

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United States university and college endowments now hold close to one‐third of their portfolios in private equity and hedge funds. We estimate the implied beliefs of endowments on these alternative assets’ returns relative to equities and bonds. At the end of 2012, the typical endowment believes that its private equity investments will outperform a portfolio of conventional assets by 3.9% per year, and hedge funds will outperform by 0.7% per year. Taking into account the implied equity exposures in alternative asset positions, the effective equity holding of endowments is approximately 60%.

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The Price of Diversifiable Risk in Venture Capital and Private Equity

Cited by 115 publications

References 48 publications

Do (Some) University Endowments Earn Alpha?

Do (Some) University Endowments Earn Alpha?

Optimal ownership structure in private equity

Investment beliefs of endowments

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