New index reveals extent of boom and bust in private equity

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Saïd Business School study reveals a greater degree of volatility in private equity than previously thought

Ludovic Phalippou

A new methodology for estimating private equity returns has taken the guesswork out of analysing the ebb and flow of performance in this asset class, and suggests that these markets may be more volatile than was previously assumed. This could have a major impact on the decisions made by institutional investors such as, pension funds, endowments, colleges and foundations.

“The value of investments in listed companies is easy to measure. You just have to look at the share price,” said Ludovic Phalippou from Saïd Business School, University of Oxford, one of the academics involved in the project. “But valuing private equities has always been more a matter of opinion, a little more sophisticated than dinner party discussions about what people’s own houses are worth. Our methodology should change that.”

The methodology, developed by an international team of academics (Andrew Ang, Bingxu Chen, both at Columbia University, and Will Goetzmann at Yale University, together with Oxford’s Phalippou) has been designed to give investors and commentators a more accurate picture of the risks and returns of investing in private equities such as real estate, venture capital, buyout and debt. Instead of focusing on measures such as volume (commonly used to assess property markets and other private equity assets), and subjective valuations (commonly used in venture capital and buyout), Phalippou and the team have used only the actual cash flows paid and received by investors in different funds to estimate returns measured over time.

The result was an index demonstrating the dynamics of private equity between 1993 and 2011, which allowed the researchers to test theories about the cyclical nature of private equity returns.

“We found that the cycles shown in our index made sense when compared with commentary about the markets at the time,” said Phalippou. “However, they also revealed a greater degree of volatility within the overall cycle than standard industry indexes. For example, the volatility of our cash flow-based return time series for buyout funds is 25% per annum compared to 11% for the Cambridge Associates buyout index. Similarly, the NCREIF real estate index has a volatility of only 5%, while our estimated volatility of private real estate funds is 19%.”

Phalippou argues that the index shows that, over time, private equity investments do outperform a size-weighted index of listed companies. However, compared with the average listed company, and/or correcting for risk, “Returns are at par at best.”

For more information or to speak with Ludovic Phalippou please contact the press office:

Clare Fisher, Head of Public Relations, Saïd Business School
Mobile: +44 (0) 7912 771090; Tel: 01865 288968
Email: clare.fisher(at)sbs(dot)

Josie Powell, Press Officer, Saïd Business School
Mobile +44 (0)7711 387215, Tel: +44 (0) 1865 288403
Email: josie.powell(at)sbs(dot) or pressoffice(at)sbs(dot)

Notes to editors

About the paper
Estimating Private Equity Returns from Limited Partner Cash Flows

About Ludovic Phalippou

About Saïd Business School
Saïd Business School at the University of Oxford blends the best of new and old. We are a vibrant and innovative business school, but yet deeply embedded in an 800 year old world-class university. We create programmes and ideas that have global impact. We educate people for successful business careers, and as a community seek to tackle world-scale problems. We deliver cutting-edge programmes and ground-breaking research that transform individuals, organisations, business practice, and society. We seek to be a world-class business school community, embedded in a world-class University, tackling world-scale problems.

In the Financial Times European Business School ranking (Dec 2013) Saïd is ranked 12th. It is ranked 13th worldwide in the FT’s combined ranking of Executive Education programmes (May 2013) and 24th in the world in the FT ranking of MBA programmes (Jan 2013). The MBA is ranked 5th in Businessweek’s full time MBA ranking outside the USA (Nov 2012) and is ranked 5th among the top non-US Business Schools by Forbes magazine (Sep 2013). The Executive MBA is ranked 23rd worldwide in the FT’s ranking of EMBAs (Oct 2013). The Oxford MSc in Financial Economics is ranked 6th in the world in the FT ranking of Masters in Finance programmes (Jun 2013). In the UK university league tables it is ranked first of all UK universities for undergraduate business and management in The Guardian (Jun 2013) and has ranked first in nine of the last ten years in The Times (Sept 2013). For more information, see


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Josie Powell
University of Oxford
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Clare Fisher
University of Oxford
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