Estimating the performance and risk exposure of private equity funds: a new methodology

We develop a new GMM-based methodology to assess the performance and risk exposure of a non-traded asset. We apply this approach to the estimation of abnormal returns and risk exposure of private equity funds. In contrast to existing work, our methodology uses actual cash flow data and avoids the use of self-reported net asset values. Using a dataset comprising 797 mature private equity funds spanning 24 years, we find a high market beta for venture capital funds and a low beta for buyout funds, and report evidence that private equity risk-adjusted returns are surprisingly low. We also find evidence thatventure capital funds load positively on SMB and negatively on HML while buyout funds load negatively on SMB and positively on HML. Finally, we shed light on previous findings that larger and more experienced funds have higher returns, by showing that this is mainlycaused by higher risk exposures of those funds, and not by abnormal performance.