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The Journal of Private Equity

The Journal of Private Equity

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Article

The Role of Financial Leverage in the Performance of Private Equity Real Estate Funds

Jamie Alcock, Andrew Baum, Nicholas Colley and Eva Steiner
The Journal of Private Equity Winter 2013, 17 (1) 80-91; DOI: https://doi.org/10.3905/jpe.2013.17.1.080
Jamie Alcock
is an associate professor at the University of Queensland in Australia and a lecturer at the University of Cambridge in Cambridge, UK. jta27@cam.ac.uk
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Andrew Baum
is an honorary professor of real estate investment at the University of Cambridge in Cambridge, UK. ab815@cam.ac.uk
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Nicholas Colley
is a senior analyst at Property Funds Research in Reading, UK. nc@propertyfundsresearch.com
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Eva Steiner
is a Ph.D. candidate at the University of Cambridge in Cambridge, UK. es434@cam.ac.uk
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Abstract

The authors study a unique data set in order to examine the performance of a sample of 169 global private equity real estate investment funds across the core, value-add and opportunistic investment style categories over the most recent property cycle (2001–2011). We employ a multifactor asset pricing model to measure the impact on the funds’ total excess returns of the underlying real estate market, managerial skill measured by Jensen’s alpha, leverage and, for the first time, managerial skill as it relates to timing leverage decisions to anticipated future market trends. find evidence consistent with the hypotheses that i) fund performance is almost directly proportional to the return on the underlying real estate market, ii) there is evidence for systematic underperformance as measured by Jensen’s alpha, possibly related to market frictions, iii) leverage cannot be viewed as a long-term strategy to enhance performance, and iv) timing leverage choices to the expected future market environment does not appear to add significantly to fund excess returns.

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The Journal of Private Equity: 17 (1)
The Journal of Private Equity
Vol. 17, Issue 1
Winter 2013
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The Role of Financial Leverage in the Performance of Private Equity Real Estate Funds
Jamie Alcock, Andrew Baum, Nicholas Colley, Eva Steiner
The Journal of Private Equity Nov 2013, 17 (1) 80-91; DOI: 10.3905/jpe.2013.17.1.080

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The Role of Financial Leverage in the Performance of Private Equity Real Estate Funds
Jamie Alcock, Andrew Baum, Nicholas Colley, Eva Steiner
The Journal of Private Equity Nov 2013, 17 (1) 80-91; DOI: 10.3905/jpe.2013.17.1.080
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