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The Journal of Alternative Investments

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Private Equity Valuations and Public Equity Performance

Megan Czasonis, Mark Kritzman and David Turkington
The Journal of Alternative Investments Summer 2019, 22 (1) 8-19; DOI: https://doi.org/10.3905/jai.2019.1.070
Megan Czasonis
is a managing director at State Street Associates in Cambridge, MA
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Mark Kritzman
is the CEO of Windham Capital Management and senior lecturer at MIT Sloan School of Management in Cambridge, MA
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David Turkington
is a senior vice president at State Street Associates in Cambridge, MA
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Abstract

It is reasonable to expect that changes in private equity valuations should bear some correspondence to public equity performance because private assets and public assets both respond to common influences such as changes in discount rates. But it is also reasonable to recognize that changes in private equity valuations should depart to some extent from public equity performance owing to differences in risk, liquidity, and cash flow expectations. These differences affect the degree of correspondence. In this article, the authors explore an additional influence on private equity valuations that affects not the degree of correspondence, but rather the symmetry of the correspondence. The authors argue that because private equity managers are less constrained than public market participants by the forces of no-arbitrage pricing, they have greater discretion to introduce biases into their valuations. Based on an extensive sample of private equity valuations, the authors find persuasive evidence that private equity managers produce positively biased valuations that appear to be rationalized by information that should not be relevant.

TOPICS: Private equity, performance measurement

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The Journal of Alternative Investments: 22 (1)
The Journal of Alternative Investments
Vol. 22, Issue 1
Summer 2019
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Private Equity Valuations and Public Equity Performance
Megan Czasonis, Mark Kritzman, David Turkington
The Journal of Alternative Investments Jun 2019, 22 (1) 8-19; DOI: 10.3905/jai.2019.1.070

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Private Equity Valuations and Public Equity Performance
Megan Czasonis, Mark Kritzman, David Turkington
The Journal of Alternative Investments Jun 2019, 22 (1) 8-19; DOI: 10.3905/jai.2019.1.070
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  • Article
    • Abstract
    • LITERATURE
    • DATA
    • METHODOLOGY
    • RESULTS
    • THE EFFECT OF BIASED VALUATIONS ON PRIVATE EQUITY PERFORMANCE
    • INVESTMENT IMPLICATIONS
    • SUMMARY
    • ACKNOWLEDGMENTS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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