Private Equity Net Asset Values and Future Cash Flows
Tim Jenkinson, Wayne R. Landsman, Brian Rountree, Kazbi Soonawalla
This paper analyzes whether fund valuations produced by private equity managers are biased predictors of future discounted cash flows (DCF). Our research is based on an extensive set of timed cash flows and reported net asset values (NAVs) that relates to 645 funds spanning 1988-2014. Using an ex ante lens, we find that, on average, reported NAVs converge on the future DCF early in the life of the fund.
This result is particularly interesting to investors for whom unbiased asset valuations are important in keeping portfolios optimally allocated. In addition, findings indicate that although NAVs generally are more conservative in the first half of the sample period, NAVs for venture capital funds tend to overstate economic value after 1999. Findings from additional tests suggest that the overstatement is attributable to the effects of the financial crisis, and that VC fund managers fail to update NAV estimates in post-crisis years to reflect the effects of the crisis on future cash flows.