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The Journal of Private Equity

The Journal of Private Equity

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Article

What Really Drives Risk Premium and Abnormal Returns
in Private Equity Funds? A New Perspective

Fernando Scarpati and Wilson Ng
The Journal of Private Equity Fall 2013, 16 (4) 8-20; DOI: https://doi.org/10.3905/jpe.2013.16.4.008
Fernando Scarpati
is a risk management and valuation consultant in London, UK.
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  • For correspondence: fascarpati@gmail.com
Wilson Ng
is a reader in innovation and entrepreneurship at Roehampton University Business School in London, UK.
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  • For correspondence: wilsoning@aol.com
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Abstract

Private equity (PE) scholars have attempted to assess the ex post returns (performance) of PE funds. Such studies have produced both contradictory conclusions and abnormal realized returns ranging from –6% (Phalippou and Gottschalg [2009]) to +32% (Cochrane [2005]). Research has focused on assessing realized returns instead of the required risk premium. This research has found a set of phenomena unique to the PE sector that influences performance and suggests that illiquidity is the only additional factor to include in asset pricing models. This article explains the drivers and determinants of the risk premium and expected abnormal returns by critiquing extant research and explaining why contradictions persist in its results. A model is proposed enabling practitioners to adopt a more rational approach to defining portfolios and assessing deals.

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The Journal of Private Equity: 16 (4)
The Journal of Private Equity
Vol. 16, Issue 4
Fall 2013
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What Really Drives Risk Premium and Abnormal Returns
in Private Equity Funds? A New Perspective
Fernando Scarpati, Wilson Ng
The Journal of Private Equity Aug 2013, 16 (4) 8-20; DOI: 10.3905/jpe.2013.16.4.008

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What Really Drives Risk Premium and Abnormal Returns
in Private Equity Funds? A New Perspective
Fernando Scarpati, Wilson Ng
The Journal of Private Equity Aug 2013, 16 (4) 8-20; DOI: 10.3905/jpe.2013.16.4.008
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  • Article
    • Abstract
    • LITERATURE REVIEW
    • NEW PHENOMENA IN PE MARKETS
    • DISCUSSING THE FIRST PREDICTIVE MODELS TO ASSESS RISK PREMIUM
    • A CLASSIFICATION MODEL OF DRIVERS: A PRACTICAL TOOL FOR GPs AND LPs
    • CONCLUSIONS
    • ENDNOTES
    • REFERENCES
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