While liquidity and cash flow risks—arising from the structure of private equity funds—are well recognised, this study shifts attention to the underlying market risk borne by investors in the equity of private companies. Specifically, it examines how variable is operating performance and how it relates to insolvency risk across a large sample of private companies and past private equity transactions.

To this end, the study makes extensive use of the PECCS® taxonomy and privateMetrics® to classify companies along PECCS pillars and analyse key risk factors. Key observations include:

1. Operating Performance Volatility and Insolvency Risk in Private Equities

• Revenue, profit, and growth volatilities exhibit systematic differences across PECCS pillars, classes, and risk factors.
• Insolvency risk can be partly explained by PECCS pillars and exposure to key risk factors, such as growth, profit, leverage, size, and maturity.
• Private equities firm level risk is comparable to that observed for listed equities.

2. Evidence from Private Equities Transactions

• Systematic differences in average pricing of transactions over 2005-2024 (e.g., P/EBITDA, P/S) across the 5 PECCS pillars and risk factors.
• Derived discount rates (expected returns) from transactions discriminates across PECCS pillars and risk factors.
• Private equities transactions incorporate systematic risk in pricing and can thus be proxied by a well calibrated model.

3. Systematic and Idiosyncratic Risks in Private Equities

• Factor model using the systematic risk factors can explain some of the variation in observed transaction prices.
• Implied discount rates for the transactions are estimated as 14% on average (with an interquartile range from 11% to 16%), roughly 6% points over public equity expected returns over time (see Figure E1).
• By expressing the uncertainty around implied discount rates, a bid-ask spread can be estimated around the systematically explained prices that varies with asset characteristics and overall private market conditions.
• A significant share of the pricing dynamics of transactions are explainable with the combination of the systematic risk factors implied price and the bid-ask spread.
• Unexplained residual pricing is idiosyncratic, random, and almost normally distributed.

The study confirms both (1) the existence of considerable operating performance and pricing variability in private equities and (2) the systematic variation of that volatility—along with observed insolvency risk—across PECCS segments and key risk factors in both firm-level data and completed transactions. These findings suggest that private equities can be priced by incorporating systematic risk factors and the structural dimensions defined by the PECCS taxonomy. This has important implications for asset-level valuation and for benchmarking private asset funds at the portfolio level.

FIGURE E1: TIME TRENDS IN ESTIMATED DISCOUNT RATES FOR TRANSACTIONS AND PUBLIC MARKETS, 2013-2024