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THE DYNAMICS OF PRIVATE EQUITY FUNDS WHEN DRAWDOWNS, PERFORMANCES AND DISTRIBUTIONS ARE CORRELATED

Etienne de Malherbe

International Journal of Theoretical and Applied Finance2025https://doi.org/10.1142/s0219024926500019article
AJG 2ABDC B
Weight
0.50

Abstract

The dynamics of a private equity fund is split into three components: the drawdowns from the committed capital paid into the fund; the performances of the investments effected by the fund; and the distributions of dividends and investment proceeds taken out of the fund. Three different but correlated diffusion processes model the three components. To keep the model tractable, a standard lognormal process is utilized for the dynamics of the investment performances and two Ornstein–Uhlenbeck processes are utilized for the dynamics of the drawdowns and the distributions. The cases of a standard and a quadratic Ornstein–Uhlenbeck process are successively examined. To complete the modeling framework, a fourth lognormal variable representing the biases and errors in the net asset values reported by the fund is introduced.

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https://doi.org/https://doi.org/10.1142/s0219024926500019

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@article{etienne2025,
  title        = {{THE DYNAMICS OF PRIVATE EQUITY FUNDS WHEN DRAWDOWNS, PERFORMANCES AND DISTRIBUTIONS ARE CORRELATED}},
  author       = {Etienne de Malherbe},
  journal      = {International Journal of Theoretical and Applied Finance},
  year         = {2025},
  doi          = {https://doi.org/https://doi.org/10.1142/s0219024926500019},
}

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R · text relevance †0.50 × 0.4 = 0.20

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