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      Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting
      15 Feb 2016Working Paper Summaries

      Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting

      by Erik Stafford
      This paper studies the asset selection of private equity investors and the risk and return properties of passive portfolios with similarly selected investments in publicly traded securities. Results indicate that sophisticated institutional investors appear to significantly overpay for the portfolio management services associated with private equity investments.
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      Author Abstract

      Private equity funds tend to select relatively small firms with low EBITDA multiples. Publicly traded equities with these characteristics have high risk-adjusted returns after controlling for common factors typically associated with value stocks. Hold-to-maturity accounting of portfolio net asset value eliminates the majority of measured risk. A passive portfolio of small, low EBITDA multiple stocks with modest amounts of leverage and hold-to-maturity accounting of net asset value produces an unconditional return distribution that is highly consistent with that of the pre-fee aggregate private equity index. The passive replicating strategy represents an economically large improvement in risk- and liquidity-adjusted returns over direct allocations to private equity funds, which charge average fees of 6% per year.

      Paper Information

      • Full Working Paper Text
      • Working Paper Publication Date: January 2016
      • HBS Working Paper Number: 16-081
      • Faculty Unit(s): Finance
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      Erik Stafford
      Erik Stafford
      John A. Paulson Professor of Business Administration
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