Morten Sorensen's webpage

Valuation Dynamics of Private Investments

Abstract:
Financial performance of private investments has distinctive features: Value can compound gradually over the holding period, like a traditional return, but it can also have a one-time jump. Moreover, the valuations are unobserved (latent) until exit, and exit and failure times are endogenous. We develop and estimate a model with these features using investments by buyout, real-estate, and distressed funds. We find a significant one-time jump for buyouts, which is potentially important for performance evaluation and portfolio choice. Our estimation uses a Bayesian Markov chain Monte Carlo (MCMC) Gibbs sampler, that simulates latent valuations using Forward Filtering-Backward Sampling (FFBS).