A Note on Attributes Affecting Private Equity Fund Pricing in Secondary Markets

Private equity (PE) funds are growing to dominate capital markets. In conjunction with this growth, secondary markets for PE stakes have also grown. Innovative recent work investigates the valuation discount that sellers of PE stakes incur and attributes this discount entirely to the illiquidity inherent in PE. In this paper, we describe how the legal structure of PE funds, instrumental to funds’ existence and operations but largely unknown in the finance and economics literature, can impose a tax discount in addition to an illiquidity discount in the secondary market. Thus, we extend this new and important stream of literature by highlighting that illiquidity may be only one attribute driving PE secondary market discounts and that after-tax, rather than pretax returns, warrant consideration in these markets. PE fund secondary markets may also provide a unique setting to examine the impact of taxes on transactions from both an investor’s and an entity’s perspective