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Primary Article

A Model for the Dynamics of Private Equity Funds

Etienne de Malherbe
The Journal of Alternative Investments Winter 2005, 8 (3) 81-89; DOI: https://doi.org/10.3905/jai.2005.608035
Etienne de Malherbe
Fund Derivatives Structurer at Rabobank International, London. Rabobank International is a trading name used by Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., which is regulated by the FSA for the conduct of investment business in the United Kingdom.
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Abstract

A private equity fund is a particular investment vehicle whose dynamics depends on three primary elements: the capital committed by the investors and drawn down into investments by the fund manager; the performance of the investments; and the dividends and proceeds distributed to the investors. In this article, each of the three elements, which correspond to the three essential phases of the private equity fund lifecycle, are modelled by a separate diffusion process. As an illiquid investment, a private equity fund also requires a specific treatment for its reported net asset value that does not necessarily represent a market value but merely represents an accounting value. Thus a fourth random variable representing the initial net asset value of the fund is introduced. This random variable deals with the uncertainties and errors in the net asset values that are reported by the fund manager. Overall, conditional on the drawdowns, distributions and initial net asset value, the model reduces to an inverse gamma process.

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The Journal of Alternative Investments
Vol. 8, Issue 3
Winter 2005
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A Model for the Dynamics of Private Equity Funds
Etienne de Malherbe
The Journal of Alternative Investments Dec 2005, 8 (3) 81-89; DOI: 10.3905/jai.2005.608035

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A Model for the Dynamics of Private Equity Funds
Etienne de Malherbe
The Journal of Alternative Investments Dec 2005, 8 (3) 81-89; DOI: 10.3905/jai.2005.608035
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