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The Journal of Alternative Investments

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Article

Modeling the Cash Flow Dynamics of Private Equity Funds: Theory and Empirical Evidence

Axel Buchner, Christoph Kaserer and Niklas Wagner
The Journal of Alternative Investments Summer 2010, 13 (1) 41-54; DOI: https://doi.org/10.3905/jai.2010.13.1.041
Axel Buchner
is postdoctoral researcher in finance at the Technical University of Munich and consultant at the Center of Private Equity Research (CEPRES) in Munich, Germany.
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  • For correspondence: axel.buchner@wi.tum.de
Christoph Kaserer
is professor of finance at the Technical University of Munich and scientific director of the Center for Entrepreneurial and Financial Studies (CEFS) in Munich, Germany.
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  • For correspondence: christoph.kaserer@wi.tum.de
Niklas Wagner
is professor of finance and financial control at Passau University, Germany and principal with Munich Financial Systems Consulting.
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  • For correspondence: niklas.wagner@uni-passau.de
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Abstract

This article presents a novel continuous-time approach to modeling the typical cash flow dynamics of private equity funds. The model consists of two independent components. First is a mean-reverting square-root process applied to model the rate at which capital is drawn over time. Second is the stream of capital distributions, which is assumed to follow an arithmetic Brownian motion with a time-dependent drift component that incorporates the typical time-pattern of the repayments of private equity funds. The empirical analysis shows that the model can easily be calibrated to real-world fund data by the method of conditional least squares and nicely fits historical data. The authors use a data set of mature European private equity funds provided by Thomson Venture Economics. Their model explains up to 99.6% of the variation in average cumulated net fund cash flows and provides a good approximation of the empirical distribution of private equity fund cash flows over a typical fund’s lifetime. Overall, the empirical results indicate that the model is of economic relevance in an effort to accurately model the cash flow dynamics of private equity funds.

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The Journal of Alternative Investments: 13 (1)
The Journal of Alternative Investments
Vol. 13, Issue 1
Summer 2010
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Modeling the Cash Flow Dynamics of Private Equity Funds: Theory and Empirical Evidence
Axel Buchner, Christoph Kaserer, Niklas Wagner
The Journal of Alternative Investments Jun 2010, 13 (1) 41-54; DOI: 10.3905/jai.2010.13.1.041

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Modeling the Cash Flow Dynamics of Private Equity Funds: Theory and Empirical Evidence
Axel Buchner, Christoph Kaserer, Niklas Wagner
The Journal of Alternative Investments Jun 2010, 13 (1) 41-54; DOI: 10.3905/jai.2010.13.1.041
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  • Article
    • Abstract
    • MODELING THE CASH FLOW DYNAMICS OF PRIVATE EQUITY FUNDS
    • MODEL ANALYSIS
    • EMPIRICAL EVIDENCE
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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