Fat tails in private equity fund returns: The smooth double Pareto distribution

Lahr, Henry (2023). Fat tails in private equity fund returns: The smooth double Pareto distribution. International Review of Financial Analysis, 86, article no. 102471.

DOI: https://doi.org/10.1016/j.irfa.2022.102471

Abstract

Does the distribution of private equity returns have fat tails? A new smooth double Pareto distribution can explain the stationary distribution of private equity funds' valuation multiples. This distribution emerges from a random growth model with lognormally distributed initial fund valuations. This model endogenously generates power-law tails in the stationary cross-section. The new distribution fits the data better than competing distributions. Fat tails are particularly pronounced in venture capital funds and suggest returns with infinite variance over the lifetime of the fund. The smooth double Pareto distribution has wide applicability to growth processes with a random initial value.

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About

• Item ORO ID
• 86790
• Item Type
• Journal Item
• ISSN
• 1057-5219
• Keywords
• Size distribution; Income distribution; Pareto law; Power-law distribution; Fat tails; Private equity; Venture capital; Financial returns
• Academic Unit or School
• Faculty of Business and Law (FBL) > Business > Department for Accounting and Finance
  Faculty of Business and Law (FBL) > Business
  Faculty of Business and Law (FBL)
• Copyright Holders
• © 2022 Henry Lahr
• Related URLs
• • http://www.henrylahr.com(Author Website)
• Depositing User
• Henry Lahr