Private Equity Renditen: Outperformance, Risiko- oder Liquiditätsprämien?

Transcription

1 Private Equity Renditen: Outperformance, Risiko- oder Liquiditätsprämien? Prof. Dr. Christoph Kaserer Technische Universität München School of Management Chair of Financial Management and Capital Markets & Center for Entrepreneurial and Financial Studies Associate Oxera Consulting, London BAI AIC, Frankfurt, 16. Mai 2018

2 Agenda I. Issues in PE performance management II. III. IV. Risk premia in PE returns Illiquidity risk premia Conclusion 2

3 Time-series Returns in PE A time weighted return tells you how one Euro invested in your portfolio accumulates over time correcting for any intermediate payments. This is also called a time-series return, compounded average growth rate (CAGR) or total return (TR). A value weighted return tells you at which compounding rate one Euro initially invested in your portfolio is transformed into a cashflow. It is determined by the structure of intermediate cash flows. This is called the internal rate of return (IRR). The PME is a time weighted return, but it reflects the return of a mixed strategy investing in PE and the public markets. Moreover, it only can be calculated as an average return over longer periods of time. In practice, so called time horizon IRRs are used in order to calculate time-series returns for PE investments. 3

4 Solution(?): Horizon pooled IRRs of global buyout & growth funds Source: Cambridge Associates (December 2016), funds formed since In practice time series PE returns are constructed by setting the RNAV equal to the current market value of a PE fund. This is a flawed assumption, as it is unrealistic and causes a stale pricing phenomenon. 4

5 Horizon pooled IRRs of US venture capital funds Source: Cambridge Associates (September 2017), funds formed since Note: According to their own calculations the EIF s VC-Portfolio had a median pooled IRR of 1,6% over the period 1998 to

6 One quarter horizon return buyout & growth equity index CAGR=15,3% p.a. Vola=23% p.a. CAGR=15,2% p.a. Vola=10% p.a. CAGR=8,8% p.a. Vola=13% p.a. Source: Own calculations based on Cambridge Associates (September 2017), buyout & growth funds since 1986 and US-VC funds since

7 Agenda I. Issues in PE performance management II. III. IV. Risk premia in PE returns Illiquidity risk premia Conclusion 7

8 Markowitz Model: How LPs (should) think about PE LPs have to solve an overall asset allocation problem. Typically, the Markowitz Model is used as a starting point. However, PE can only be integrated into this approach, if expected time-series returns, volatility and correlation is known. Time horizon IRRs do not allow for the estimation of these parameters because of the stale pricing phenomenon. 8

9 The CAPM as a starting point According to the CAPM the only relevant risk measure for a risky asset is the Beta (market risk). Fama/French (1992) synthesize this pertinent evidence by showing the sizeand the market-to-book-effect is quite stable. So, in 1993 they came up with the FF3FM: Note, Fama/French (2015) have extened this to a five factor model. 9

10 How to extract Alphas and Betas from PE returns Looking at a given fund i, the IRR is defined as: However, because of the market risk inherent to any PE-investment, a more appropriate approach is defined as follows: TT tt=0 TT tt=0 CCCC tt ii 1 + IIIIII tt = 0 CCCC tt ii = NNNNNN tt ss=0 1 + αα + rr ff,ss + ββ rr mm,ss rr ff,ss + ss SSSSSS ss + h HHHHHH ss By applying this calculation to a universe of N funds and determining the factor exposure in a way that the NPV is minimized, PEs market risk (β), size (s) and value (h) factor exposure as well as its alpha can be extracted. 10

11 TED-Frage Wie hoch glauben Sie ist der durchschnittliche Beta-Faktor von Buy-out-Fonds? 1. Unter 0,5 2. Zwischen 0,5 und 1 3. Zwischen 1 und 1,5 4. Über 1,5 Wie hoch glauben Sie ist der durchschnittliche Beta-Faktor von Venture-Capital- Fonds? 1. Unter 1 2. Zwischen 1 und 1,5 3. Über 1,5 11

12 PE seems to have significant market risk Authors Data α β Size (s) Value (h) Cochrane (2005) 7,765 firms (VC), Pos 1,9 Korteweg/Sorensen (2010) 18,237 firms (VC), Neg 1,8-2,7 (0,3) (1)-(1,2) Driessen et al. (2012) 686 VC-funds, Neg 2,4-2,7 n.s. n.s. Driessen et al. (2012) 272 BO-funds, n.s. 1,3-2,1 n.s. n.s. Franzoni et al. (2012) 4,403 firms (BO), n.s. 1,3-1,5 n.s. (0,5)-(0,7) Ang et al. (2013) 516 VC-funds, Pos 1,6 n.s. n.s. Ang et al. (2013) 478 BO-funds, Pos 1,3 n.s. 0,5-0,7 Jegadeesh et al. (2015) 24 listed FoF, n.s. 0,7-0,8 0,5 0,3-0,4 Stafford (2015) PE replicated by listed firms Neg Pos Kaserer/Romahn (2018)* 682 funds, Pos? 0,5-1,2 Pos Neg * highly preliminary results 12

13 Constructing a PE-benchmark based on a FF3FM CAGR=15% p.a. Vola=10% p.a β=1,3 s=-0,3 h=0,7 CAGR=13% p.a. Vola=21% p.a CAGR=8,5% p.a. Vola=13% p.a S&P500 PE PE-Benchmark (FF) Source: Own calculations based on Cambridge Associates (December 2016), funds formed since 1986; benchmark is based on US-data delivered by Kenneth French. 13

14 PE returns can be allocated to different risk sources Yearly arithmetic mean return PE-Benchmark 14,6% = Market risk [β x (r m -r f )] 9,8% + Value factor exposure [h x HML] 2,9% + Size factor exposure [s x SMB] -0,7% + Risk free rate 2,5% PE-universe 14,8% 14

15 Market Risk of Buy-out Funds over Time 1,40 1,30 1,20 1,10 1,00 0,90 0,80 0,70 0,60 0,50 0,40 Beta Source: Kaserer/Romahn (2018); highly preliminary results based on Prequin-data of buy-out funds. 15

16 Agenda I. Issues in PE performance management II. III. IV. Risk premia in PE returns Illiquidity risk premia Conclusion 16

17 Monthly return premium of illiquid stocks Weighting Equally Market value Trading volume Developed markets (26 countries) Mean (t-value) 0,58% (3,9) 0,25% (2,5) 0,60% (4,4) Median 0,45% 0,32% 0,52% Germany Mean 0,72% 0,36% 0,47% Emerging markets (19 countries) Mean (t-value) 1,11% (8,6) 0,82% (6,4) 0,95% (6,8) Median 1,06% 0,81% 0,88% Source: Amihud et al. (2015) Note: in developed countries the market value weighted return difference between the fifth of stocks with the lowest liquidity and the fifth with the highest liquidity is 0,25x12=3%. 17

18 Monthly return premium of illiquid stocks worldwide Source: Amihud et al. (2015) 18

19 TED-Frage Sind Sie der Meinung, dass Liquiditätsrisiken einen Einfluss auf PE-Renditen haben? 1. Ja 2. Nein Falls Sie mit Ja geantwortet haben, welche Gründe könnte es Ihrer Meinung nach dafür geben? 1. Wiederverkaufsrisiken für Investoren 2. Niedrige Marktliquidität geht typischerweise mit hohen Refinanzierungskosten einher 3. Weiß nicht 19

20 PE seems to have significant liquidity risk Authors Data α β Value (h) Liq. (l) Franzoni et al. (2012) 4,403 firms (BO), n.s. 1,3-1,5 0,7-1,0 0,6 Ang et al. (2013) 516 VC-funds, Pos 1,6 n.s. n.s. Ang et al. (2013) 478 BO-funds, Neg 1,3 0,5-0,7 0,5-0,6 Kaserer/Romahn (2018) 682 funds, Pos? 0,5-1,2 Neg. 0,5 20

21 Constructing a PE-benchmark based on a FFPS4FM β=1,3 s=-0,3 h=0,7 l=0,6 CAGR=15,6% p.a. Vola=24% p.a CAGR=15% p.a. Vola=10% p.a CAGR=8,5% p.a. Vola=13% p.a. S&P500 PE PE-Benchmark (FF-PS) Source: Own calculations based on Cambridge Associates (December 2016), funds formed since 1986; benchmark is based on US-data delivered by Kenneth French and Lubos Pastor. 21

22 PE returns can be allocated to different risk sources Yearly arithmetic mean return PE-Benchmark 17,8% = Market risk [β x (r m -r f )] 9,8% + Value factor exposure [h x HML] 2,9% + Size factor exposure [s x SMB] -0,7% + Risk free rate 2,5% + Liquidity risk exposure [l x LIQ] 3,2% PE-universe 14,8% 22

23 Market and Liquidity Risk of Buy-out Funds over Time 1,80 1,60 1,40 1,20 1,00 0,80 0,60 0,40 Beta LIQ Source: Kaserer/Romahn (2018); highly preliminary results based on Prequin-data of buy-out funds. 23

24 Agenda I. Issues in PE performance management II. III. IV. Risk premia in PE returns Illiquidity risk premia Conclusion 24

25 Summary and outlook PE shows very positive returns over the last 25 years, even though typical return measures (IRR, PME) are flawed. In order to infer to what extent PE returns are compensation for risk and to what extent outperformance (alpha), it is necessary to integrate PE return in widely used asset pricing models. Significant progress has been made in this direction over the last years, giving us a better understanding of the return drivers in PE today. The most important return driver is a significant market risk (β>1) and, to a lesser extent, also a value premium. Moreover, there is upcoming evidence that liquidity risk also contributes significantly to PE performance. Therefore, PE returns can be explained to a large extent as a compensation for market and liquidity risk topped by a value premium. 25