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Title:Stochastic modeling of private equity: an equilibrium based approach to fund valuation PDF Logo
Authors:Buchner, Axel
Kaserer, Christoph
Wagner, Niklas
Issue Date:2006
Series/Report no.:CEFS working paper series 2006-02
Abstract:In this paper, we present a new approach to measure the returns of private equity investments based on a stochastic model of the dynamics of a private equity fund. Our stochastic model of a private equity fund consists of two independent stages: the stochastic model of the capital drawdowns and the stochastic model of the capital distributions over a fund's lifetime. Capital distributions are assumed to follow lognormal distributions in our approach. A mean-reverting square-root process is applied to model the rate at which capital is drawn over time. Applying equilibrium intertemporal asset pricing consideration, we are able to derive closed-form solutions for the market value and time-weighted model returns of a private equity fund.
Subjects:Private Equity Funds
Stochastic Modeling
Mean-Reverting Square-Root Process
Incomplete Markets
JEL:G24
D52
G13
Document Type:Working Paper
Appears in Collections:CEFS Working Paper Series, Center for Entrepreneurial and Financial Studies, Technische Universität München

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