Private Equity Performance and Liquidity Risk





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    • Francesco Franzoni and Eric Nowak are at the University of Lugano and Swiss Finance Institute, via G. Buffi 13, Lugano, Switzerland. Ludovic Phalippou is at the University of Oxford Said Business School and Oxford-Man Institute, OX1 1HP, Oxford, UK. We are especially grateful to the Editor, Cam Harvey, and anonymous Associate Editor and referee for greatly contributing to the final version of the paper. We are also grateful to Philipp Krohmer and Daniel Schmidt of CEPRES GmbH for their support and for giving us access to their database. We thank Viral Acharya; Fernando Anjos; Giovanni Barone-Adesi; Alessandro Beber; Dion Bongaerts; Andrea Caprara; Joost Driessen; Frank de Jong; Patrick Gagliardini; Tim Jenkinson; Christian Julliard; Marcin Kacperczyk; Aditya Kaul; Laurence Lescourret; Hanno Lustig; Roni Michaely; Adair Morse; Tarun Ramadorai; Christian Rauch; Diego Ronchetti; Elvira Sojli; Per Stromberg; Fabio Trojani; Marno Verbeek; Anette Vissing-Jorgensen; and conference participants at ESSEC; Erasmus University; ISCTE; the CEPR Symposium in Gerzensee; the German Finance Association Meeting; Argentum PE conference; and seminar participants at the Universities of Amsterdam, Oxford, and Tilburg for helpful comments. We thank Alexander Eisele for excellent research assistance. We are also grateful to Vera Baranouskaya. This project is financially supported by NETSPAR, NCCR-FINRISK, and RICAFE II (European Commission contract no. 028942.)


Private equity has traditionally been thought to provide diversification benefits. However, these benefits may be lower than anticipated as we find that private equity suffers from significant exposure to the same liquidity risk factor as public equity and other alternative asset classes. The unconditional liquidity risk premium is about 3% annually and, in a four-factor model, the inclusion of this liquidity risk premium reduces alpha to zero. In addition, we provide evidence that the link between private equity returns and overall market liquidity occurs via a funding liquidity channel.