Managed Pricing and the Rule of Conservatism in Private Equity Portfolios

Abstract

All private equity funds face the difficult issue of placing a value on the worth of their private equities. The rule of conservatism states that portfolios should be marked down quickly and up slowly, and that a triggering event, such as a new round of investment, should provide an obective, market-driven valuation point. This article determines the performance in non-market equity pricing for three classes of private equity (venture capital, leveraged buyouts, and mezzanine debt) against the U.S. Treasury bill, Nasdaq, Russell 1000, and Russell 2000 benchmark rates of return.