Tag: G23

We examine the drivers of private equity in response to the fully exogenous Covid-19 shock, employing listed private equity as a proxy for traditional non-listed private equity. This approach enables us to reliably measure firm characteristics and performance in real-time. Listed private equity firms, on average, underperformed significantly during the crisis, with a performance drop ranging from 9.2 % to 43.6 %, depending on the model used. However, there is substantial cross-sectional variation driven by unique firm-level attributes including access to capital, liquidity, transparency, and ownership structure. Listed private equity with better access to capital and higher transparency shows resilience during the crisis, while higher illiquidity and opacity exacerbate the negative effects. This study offers early evidence on Covid-19′s impact on private equity firms, highlighting value drivers and performance dynamics of this alternative asset class during a period of extreme tail risk.

Authors: Hrvoje Kurtović / Garen Markarian
Publication date: 1 December 2023
Published in: Journal of Empirical Finance
Volume/ Ausgabe: Volume 75
Source download link: https://www.sciencedirect.com/science/article/pii/S092753982300124X

Private equity (PE) risk and performance is a black box for investors, as information is quasi-private during a fund’s life. To overcome this issue, the authors use the universe of listed PEs (LPEs) in US exchanges, which permits the measurement of financial fundamen¬tals based on audited quarterly reports, and the observation of share price performance and volatility on a real-time basis. They first show that LPE performance and valuations are highly correlated to that of unlisted PEs, and hence are a good proxy. LPEs constantly exhibit leverage double that of the broader market while showing no distinctive share price performance. Controlling for standard determinants of returns, LPE firms do not outperform market benchmarks. Using COVID-19 as an exogenous increase in tail risk, PE firms grossly underperformed as markets penalized the riskiness and lack of transparency inherent in PE investments. The problems are likely greater in privately held PEs, where performance is self-reported, not audited, and illiquidity periods last up to 10 or 12 years.

Authors: Hrvoje Kurtovic / Garen Markarian / Patrick Breuer
Publication date: 22 May 2023
Published in: The Journal of Alternative Investments
Volume/ Ausgabe: Volume 26, Issue 1
Source download link: https://www.pm-research.com/content/iijaltinv/early/2023/05/21/jai20231191