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Publications
  • July 2023
  • Article
  • Journal of Portfolio Management

Takahashi-Alexander Revisited: Modeling Private Equity Portfolio Outcomes Using Historical Simulations

By: Dawson Beutler, Alex Billias, Sam Holt, Josh Lerner and TzuHwan Seet
  • Format:Electronic
  • | Pages:15
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Abstract

In 2001, Dean Takahashi and Seth Alexander of the Yale University Investments Office developed a deterministic model for estimating future cash flows and valuations for the Yale endowment’s private equity portfolio. Their model, which is simple and intuitive, is still commonly used by investors to this day. However, the model possesses significant shortcomings, including its sensitivity to the assumptions necessary for the model to function and its failure to provide a range of possible portfolio outcomes. Both issues can result in investors developing overconfidence in forecasts, which can result in suboptimal—or even adverse—portfolio management decisions. To address these shortcomings, we propose a novel historical simulation approach that preserves the simplicity and intuition behind Takahashi and Alexander’s approach. However, our model, which leverages historical private equity cash flow data, requires no user assumptions and naturally provides a range of outcomes. We explore this model in some depth, highlighting the model’s power and flexibility across myriad use cases.

Keywords

Forecasting and Prediction; Investment Portfolio; Analytics and Data Science

Citation

Beutler, Dawson, Alex Billias, Sam Holt, Josh Lerner, and TzuHwan Seet. "Takahashi-Alexander Revisited: Modeling Private Equity Portfolio Outcomes Using Historical Simulations." Journal of Portfolio Management 49, no. 7 (July 2023): 144–158.
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About The Author

Josh Lerner

Entrepreneurial Management
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More from the Authors
  • Private Equity and Workers: Modeling and Measuring Monopsony, Reallocation, and Trust By: Kyle Herkenhoff, Josh Lerner, Gordon M. Phillips, Francisca Rebelo and Benjamin Sampson
  • Impact Investing and Worker Outcomes By: Josh Lerner, Markus Lithell and Gordon M. Phillips
  • Hunter Point Capital By: Josh Lerner, John D. Dionne and Srimayi Mylavarapu
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