Weatherspoon Distinguished Professor of Finance, UNC Kenan-Flagler Business School. Research Director and Founder, Institute for Private Capital. Previously served as Research Director of Amundi Smith Breeden. PhD in Finance from University of Texas at Austin, BS in Physics and Economics from Duke University.
Leading expert in Bayesian Time-Series Models and Dynamic Predictive Synthesis. Previously served as Quantitative Researcher at the Federal Reserve Bank of Atlanta. Masters in Statistics from Duke University (PhD coursework, advisor Mike West), advanced graduate mathematics and statistics at Columbia and LSE, BA Economics from Trinity College.
Associate Professor (with tenure) and Elstrott Professor of Entrepreneurship at Tulane University Freeman School of Business. Research Fellow, Private Equity Research Consortium. Leading expert on quantitative methods for alternative investments. PhD and MBA in Finance from UNC Kenan-Flagler Business School. Diploma from St. Petersburg State University of Architecture and Civil Engineering.
“We estimate unsmoothed private equity net asset values (NAVs) at weekly frequency for individual funds. Using simulations and large samples of buyout and venture funds, we show that our method yields superior estimates of NAVs relative to simple approaches based on extrapolation of reported NAVs. The market beta of an average buyout (venture) fund is around 1.0 (1.4), and the total risk is 33% (40%) per year. The risk-return profile of the funds varies significantly over time and across funds. Risk-taking and reporting quality appear to persist by manager.”Read at Oxford Academic →
“We characterize the factors common between public and private equity (PE) returns as well as the factors specific to private and public returns, respectively. Using a comprehensive dataset of PE funds and recent advances in PE fund returns nowcasting at high frequency and factor extraction in a grouped data setting, we show that, albeit over 90% of PE returns may be explained by factors common with the matched public equities, the remaining variation exhibits robust factors that are distinct to PE. These PE-specific factors significantly increase a portfolio’s Sharpe ratio through higher expected return and better diversification. The optimal allocation to PE is positive at the 95% confidence level—at 11 to 24% of risky portfolio, depending on the public equity portfolio characteristics—even after accounting for sampling error and imposing the no-shorting constraint within the PE portfolio. Additionally, we show that the two most commonly used datasets on PE fund returns have virtually identical common factors with public equities, but over half of their PE-specific variation is distinct from one another. Our approach ensures that the alpha we find cannot be mimicked by a tailored-enough portfolio of listed equities.”Read on SSRN →
“Private equity investors rely on reported fund performance to make informed investment decisions. This paper provides evidence that buyout funds manage multiples of invested capital (MOICs) for portfolio companies to avoid incurring and reporting capital losses. In the distribution of deal-level MOICs, we document an unusually low frequency of multiples just below 1.0 and an unusually high frequency of payouts that are equal to or just above 1.0. This behavior is consistent with funds attempting to minimize loss ratios which are commonly used to assess the riskiness of funds by outside investors and consultants. We document that more experienced general partners (GPs) appear more likely to engage in loss avoidance and do so while they are fundraising for their next fund. Loss avoidance may provide financial benefits because loss-avoiding GPs raise significantly larger subsequent funds relative to their vintage year peers. While loss avoidance may benefit GPs, it is negatively associated with the final fund returns that investors receive.”Read the working paper (PDF) →
“Performance analysis of private equity funds is challenging because fund ownership does not trade in a liquid market with observable prices. Instead, performance analysis—especially during a fund’s life—must rely on observed cash flows to and from the fund and quarterly net asset value (NAV) estimates. Further complicating the analysis are the increasingly common practices of funds using subscription lines of credit (fund-level debt) and recycling capital. Even the variation in the timing of capital deployment across funds has important implications for common performance measures used to evaluate funds, such as internal rate of return (IRR) and multiple on invested capital (MOIC). In this article, the authors analyze a set of simulated funds to better understand how fund performance analysis is affected by these common issues. Overall, the analysis suggests that intermediate IRRs—that is, values likely observed during fundraising periods for subsequent funds—are strongly affected by subscription lines and deployment pacing. Intermediate MOICs are only weakly affected by subscription lines but are strongly affected by capital deployment pacing. Both IRRs and MOICs are strongly affected by recycle deal accounting methodology. The authors conclude that investors need to be cognizant of these issues when measuring and utilizing fund performance measures during the life of a fund as well as when assessing ultimate performance at the end of fund life.”Read on SSRN → Journal version →
“We propose a simple and intuitive measure of the annualized excess return of investments in private equity (PE) funds, as well as in similar vehicles that hold hard-to-value assets. Our ‘Direct Alpha’ method is well-founded in theory and dominates the existing approaches to convert fund lifetime returns into inputs amenable for portfolio-wide optimization. Existing Public Market Equivalent (PME) approaches are either heuristic or involve significant approximation errors. Using real-world PE fund cash flow data, we juxtapose Direct Alpha against nearly all PME methods that have been in broad use.”Read at ScienceDirect →
“This paper evaluates the pros and cons of including private equity fund investments in defined contribution plans. Potential benefits include higher returns and improved diversification as well as a relatively safe method for accessing investments previously only available to institutions and the very wealthy. Despite these enticing benefits, they need to be weighed against potential challenges and costs that may arise from creating this broader access to private funds. The complicated structure and uncertainty around the mechanism to provide required liquidity backstops may bring increased fees or even disrupt the private fund model.”Read at Taylor & Francis → Open access →
“The authors address the challenges of applying portfolio performance attribution techniques to private funds. One such challenge is that private equity funds have no periodically reported returns. The authors provide a method for attributing private portfolio performance to commitment timing and sizing, geography and strategy selection, and fund selection skills. They are measured relative to a market benchmark and can be interpreted as alphas. The authors also calculate and illustrate reasonable confidence intervals for these attributes with venture capital and buyout cash flow data. The factors explain how managers’ strategic and tactical allocation decisions impact performance and inform future decision making.”Read at PM Research →
“Private equity performance, both for buyouts and venture capital, has been highly cyclical: periods of high fundraising have been followed by periods of low performance. Despite this seemingly predictable variation, we find modest gains, at best, to pursuing realistic, investable strategies that time capital commitments to private equity. This occurs, in part, because investors can only time their commitments to funds; they cannot time when commitments are called or when investments are exited. There is a high degree of time-series correlation in net cash flows even across commitment strategies that allocate capital in a very different manner over time.”Read at ScienceDirect → NBER working paper →
“The authors provide an overview of the main accomplishments of private equity since the emergence of leveraged buyouts in the 1980s, and of the challenges now facing the industry—challenges that have been encountered before during three major growth waves and two full boom-and-bust cycles. In so doing, the authors review a large and growing body of academic studies responding to questions like these: (1) How have PE buyout companies performed relative to their public counterparts? And to the extent there have been improvements in operating performance and productivity gains, how have such gains been achieved? What role have PE firms played in this process? (2) Especially in light of the large fees and profit shares paid to the PE firms, or GPs, and the significant ‘control’ premiums over market paid to the selling companies, how have the returns to the LPs that provide the bulk of the funding for PE funds compared to the returns earned by the shareholders of comparable public companies? (3) Apart from the high fees earned by its GPs, why is PE so controversial? Beyond their effects on productivity and benefits for investors, what are the employment and other social effects of buyouts and PE? (4) What are the prospects for future PE returns to their LPs, especially in light of the volume of capital commitments and high purchase multiples that were being paid, at least until the onset of the COVID pandemic? And what role, if any, should PE activity be expected to play in the recovery from the pandemic?”Read at Wiley → Open access (PDF) →
“We examine the performance of 2,790 private equity (PE) funds incepted during 1979-2008 using Stochastic Discount Factors (SDFs) implied by the two leading consumption-based asset pricing models (CBAPMs) — external habit and long-run risks — as their assumptions appear consistent with investment objectives of avid PE investors. In contrast to CAPM-based inference, venture funds did not destroy value under these CBAPMs in post-2000 vintages and may even have outperformed buyouts and generalists in the full sample. We find that 2007-08 venture vintages provide a better hedge for post-crises consumption shocks than other types of PE, and that the temporal variation in PE excess returns is significantly smaller under CBAPMs. Our contribution is also methodological. We extend the realized risk premia matching insight of Korteweg and Nagel (2016) to a more general class of SDFs, namely portfolio-specific discount factors that reflect non-tradeable assets unspanned by standard benchmarks. To this end, we propose a more efficient estimation of SDF parameters in this context and develop a finite sample bias correction for NPV-based inference with long-duration assets.”Read on SSRN →
“Private equity funds hold assets that are hard to value. Managers have incentives to distort reported valuations if these reports are used by investors to decide on commitments to subsequent funds. Using a large dataset of buyout and venture funds, we test for the presence of return manipulations. We find that some underperforming managers inflate reported returns during fundraising. However, those managers are less likely to raise a next fund, suggesting that investors can see through the manipulation. In contrast, top-performing funds appear to understate valuations. A simple theoretical framework rationalizes our empirical results as well as those of related papers.”Read at ScienceDirect →
Understanding Private Capital Alpha with Greg Brown
On the Private Capital Alpha framework for risk-adjusted returns across buyout, venture and real estate funds, built on the MSCI Burgiss dataset with the Private Equity Research Consortium.
What Investors Need to Know to Value Private Portfolios
An edited Q&A with Amy Resnick on how institutional asset owners should value illiquid private equity and venture portfolios, including the statistical nowcasting model for more timely fair values.
Improving Alpha: Gregory Brown on Deploying Alternative Research to Aid Institutional InvestorsPodcast
Interviewed by Michael Oliver Weinberg on risk-adjusted returns of private funds, GP deal structures, return correlation, and real assets as an inflation hedge.
Where Does Private Equity Performance Come From?Podcast
Hosted by Indrani De, on the sources of private equity returns and how they should be measured.
Garcia’s Take: IPO Markets Are Back. Will Private-Equity Asset Sales Be Next?Subscription
On the reopening of exit routes for private equity and what it implies for the pace of realisations.
Garcia’s Take: How Strong Is Private Equity’s Smoothing Appeal?Subscription
On whether the low measured volatility of private equity reflects genuine diversification or the smoothing of appraisal-based marks.
Our catalogue of simulation runs and cross-study meta-analyses is being prepared for publication. Check back shortly.