The Implications of Fair Value Accounting Standards
on Private Equity Buyout Returns

Abstract

Since the late 1970s, private equity has become an increasingly important financial asset class with significant economic impact. The article addresses private equity characteristics, delineates how fair value accounting practices entered the industry, and empirically examines the implications of fair value accounting practices on LBO returns. Nevertheless, the question of how to account for private equity funds’ unrealized investments remains highly controversial. This article empirically examines whether fair value accounting provides more accurate valuations and enhances comparability with public databases. The results show that time lags in private equity reporting have to be considered in return attribution and that leading buyout return indices have become more correlated since 2000 with the use of fair value accounting.

TOPICS: Private equity, security analysis and valuation, statistical methods, volatility measures