Key Takeaways
- • Market prices for listed buyout fund interests reveal substantially higher volatility (29% annualized) than reported NAVs (19% annualized) over the 20-year period ending June 2025, suggesting traditional risk measurements underestimate private equity exposure by roughly 53%.
- • The research examines portfolios of buyout fund interests trading on European stock exchanges, providing a unique empirical approach to measure private equity risk by comparing market valuations against fund sponsor-reported Net Asset Values for identical underlying assets.
- • Reported NAVs may artificially smooth observed return series due to periodic valuation by fund sponsors rather than continuous market marking, potentially inflating measured alpha and understating true systematic risk in private equity allocations.
- • The findings have significant implications for institutional investors—pension funds, endowments, and other allocators relying on private equity for diversification and above-market returns—who may be misjudging portfolio risk and return profiles based on NAV-reported metrics alone.
Summary
A research paper by Ennis and Rasmussen, published in September 2026, challenges the widely accepted risk metrics for private equity by examining how buyout fund interests are priced when they trade on public exchanges. The study addresses a persistent problem in private equity performance measurement: the difficulty in assessing true risk exposure when assets are not continuously marked to market like publicly traded securities.
The researchers approached this methodological gap by analyzing portfolios of buyout fund interests that actually trade on European stock exchanges. This unique dataset enabled direct comparison between market-determined prices and the periodic Net Asset Values (NAVs) reported by fund sponsors—essentially examining the same underlying private equity assets through two distinct valuation lenses. Over the 20-year period ending June 2025, the divergence between these valuation methods proved striking. Annualized volatility measured using market prices reached approximately 29%, compared with 19% when calculated from reported NAVs. This 53% difference in measured volatility is substantial and carries important consequences for how institutional investors assess their private equity allocations.
The core issue highlighted by the research relates to how private equity fund sponsors determine NAVs periodically rather than allowing continuous market pricing. This valuation methodology can result in smoothing effects on reported returns, potentially obscuring the true underlying volatility of portfolio assets. If measured volatility appears artificially suppressed, the corollary is that alpha—returns above market benchmarks—may be inflated relative to the risk actually incurred. For institutional investors including pension funds, endowments, and family offices that have substantially increased private equity allocations based on beliefs about superior risk-adjusted returns and diversification benefits, this distinction between NAV-reported and market-priced risk metrics carries material portfolio implications. The paper suggests that traditional private equity performance evaluation frameworks may systematically underestimate the risk component of the classic risk-return trade-off.
The researchers approached this methodological gap by analyzing portfolios of buyout fund interests that actually trade on European stock exchanges. This unique dataset enabled direct comparison between market-determined prices and the periodic Net Asset Values (NAVs) reported by fund sponsors—essentially examining the same underlying private equity assets through two distinct valuation lenses. Over the 20-year period ending June 2025, the divergence between these valuation methods proved striking. Annualized volatility measured using market prices reached approximately 29%, compared with 19% when calculated from reported NAVs. This 53% difference in measured volatility is substantial and carries important consequences for how institutional investors assess their private equity allocations.
The core issue highlighted by the research relates to how private equity fund sponsors determine NAVs periodically rather than allowing continuous market pricing. This valuation methodology can result in smoothing effects on reported returns, potentially obscuring the true underlying volatility of portfolio assets. If measured volatility appears artificially suppressed, the corollary is that alpha—returns above market benchmarks—may be inflated relative to the risk actually incurred. For institutional investors including pension funds, endowments, and family offices that have substantially increased private equity allocations based on beliefs about superior risk-adjusted returns and diversification benefits, this distinction between NAV-reported and market-priced risk metrics carries material portfolio implications. The paper suggests that traditional private equity performance evaluation frameworks may systematically underestimate the risk component of the classic risk-return trade-off.
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