How Big of a Lemons Market is the Secondary Market for Private Equity Real Estate Limited Partnerships?

We find that shares of real estate limited partnerships sell at substantial discounts to net asset values (NAV) and these discounts are influenced by factors associated with agency costs and unrealized gains. Our study builds on previous work by Barber (1996) by examining a much longer time period (1994-2013), including additional control variables, and utilizing Tobit estimation instead of OLS, which we find superior. We find much larger effects of unrealized capital gains than Barber (1996). Factors that reduce fund managers’ freedom to take actions that might reduce shareholder returns such as leverage and high dividend payments reduce discounts.