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A Simple Utility Approach to Private Equity Sales

A Simple Utility Approach to Private Equity Sales

The paper examines the liquidity risk of a private equity firm that decides to dispose of a large holding in its portfolio. As the sale takes time, it requires a careful balancing act of the exposure to the fluctuations in the market value of the investment against the large sale-induced price depression. A mean-standard deviation utility framework is an appealing decision tool for optimizing protracted asset dispositions. The firm maximizes the expected profit from the sale strategy net of the price concession minus a penalty function for exposure to the price risk, with the penalty weight related to a loss confidence interval.

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