“Bollen, Nicolas P. B. and Sensoy, Berk A., How Much for a Haircut? Illiquidity, Secondary Markets, and the Value of Private Equity (May 17, 2015). Fisher College of Business Working Paper No. 2015-03-08. Available for download at SSRN: http://ssrn.com/abstract=2608549

“Limited partners (LPs) of private equity funds commit to invest with significant uncertainty regarding the timing of capital calls and payoffs and extreme restrictions on liquidity. Secondary markets have emerged which alleviate some of the associated cost. This paper develops a subjective valuation model incorporating these institutional features. Private equity values are sensitive to the discount in secondary market transactions, especially for more risk averse LPs. Model-implied breakeven returns generally exceed empirically observed returns. However, highly risk tolerant LPs may find private equity attractive at portfolio allocations observed in practice, especially if they can access above-average funds and an efficient secondary market.”