The financial performance of private investments has several features that are not present for publicly traded investments: Valuations are unobserved (latent) until exit. Exit time and failures are endogenous. Value can compound gradually over the holding period, like a traditional return, but unlike traditional returns it can also have a one-time jump component. Estimating our model for investments by private buyouts, real estate, and distressed funds provides new economic insights into the different dynamics across these different assets. Our estimation uses a Bayesian numerical Markov Chain Monte Carlo (MCMC) Gibbs Sampling procedure, with latent valuations sampled using Forward Filtering-Backward Sampling (FFBS)
Arthur Korteweg, University of Southern California
Morten Sorensen, Dartmouth College
