Professor Steven Kaplan Studies Private Equity Valuations

A recent Barron’s article discussed how hedge funds are adding private equity investments to their holdings in the search for greater returns. A key focus of the article was valuation of private equity funds. The private nature of the investments can make it hard to determine their performance.

Cambridge Associates, an investment research and consulting firm, was very positive. According to the article, they estimated that venture capital funds returned an average of 36 percent between 1986 and 2000.

However, Barron’s referred to a recent study by Steven Kaplan, Neubauer Family Professor of Entrepreneurship and Finance, and a colleague at MIT published in the Journal of Finance that was much more cautious. Their study looked at a 30-year period that ended in 2000. They found performance rarely exceeded the stock market. One reason was the large number of funds. The newer funds tended to under-perform the market

The article went on to describe several aspects investors need to be aware of surrounding the mixing of liquid and non-liquid holdings.

The original article, “Lure of Private Equity,” appeared in Barron’s on September 26, 2005.