In this paper, I extend the results of Moskowitz and Vissing-Jørgensen (2002) (henceforth MVJ) on the returns to entrepreneurial investments in the United States. First, I replicate the original set of findings in Moskowitz and Vissing-Jørgensen (2002) using the authors’ methodology and data from the four Surveys of Consumer Finances available for the period from 1989 to 1998. I then incorporate into analysis subsequently released waves of SCF 2001, 2004 and 2007 and assess the robustness of the findings to this extension.
I focus on the results regarding the composition of entrepreneurial portfolios and relative returns to private equity. In the extended period, I find an equally high concentration and poor diversification in entrepreneurial portfolios documented in MVJ. When comparing returns to the indices of entrepreneurial and publicly traded equity (given by both CRSP market index and S&P 500 index return), I also find that entrepreneurial equity significantly outperformed public equity in the later period. In particular, in 1999-2001 the average public equity returns fell dramatically to non-positive values reflecting the poor performance of public equity markets, while returns to entrepreneurial equity remained largely unaffected. This is in sharp contrast to the original finding of Moskowitz and Vissing-Jørgensen (2002) that over the period from 1989 to 1998 private equity returns were no higher than returns to public equity.
From an accounting perspective, this result is due to the continued loss in the value of outstanding public equity between 1999 and 2002. The value of private equity over the same period, if anything, has grown. This raises the question of the accuracy of owners’ valuations of non-traded private equity in the absence of active markets as in the case of public equity. To address this issue, I validate my findings using returns of investors in private equity industry. The original finding by Moskowitz and Vissing-Jørgensen seemed to suggest a ”far worse risk-return trade-off in the privately held firms of entrepreneurs relative to public equity” and has been termed the ”private equity premium puzzle.” This ”puzzle” is not a robust feature of the data and does not survive beyond the 1990s, a period of extraordinarily high public equity returns.
The paper is organized as follows. Section 2 provides an update from SCF 2001, 2004 and 2007 on the basic facts regarding the relative size of public and private equity, as well as the concentration of entrepreneurial portfolios in the United States, and presents extended series of returns to public and private equity for the period from 1989 to 2007. Section 4 validates the results using different measures of investment returns in private equity industry. Section 5 provides the discussion of the assumptions behind the original MVJ methodology and their alternatives. It also reports on the robustness of the results to them. Section 6 concludes.
