Nber Working Paper Series the Cash Flow, Return and Risk Characteristics of Private Equity

Using a unique dataset of private equity funds over the last two decades, this paper analyzes the cash flow, return, and risk characteristics of private equity. We document the draw down and capital return schedules for the typical private equity fund, and show that it takes several years for capital to be invested, and over ten years for capital to be returned to generate excess returns. We provide several determining factors for these schedules, including existing investment opportunities and competition amongst private equity funds. In terms of performance, we document that private equity generates excess returns on the order of five plus percent per annum relative to the aggregate public equity market. One interpretation of this magnitude is that it represents compensation for holding a 10-year illiquid investment. Alexander Ljungqvist Matthew Richardson Department of Finance Department of Finance Stern School of Business Stern School of Business New York University New York University MEC9-190 MEC9-190 44 West 4 Street 44 West 4 Street New York, NY 10012-1126 New York, NY 10012-1126 [email protected] and NBER [email protected]