In this paper, we investigate whether fund-specific risk helps explain performance persistence in private equity funds, using detailed deal-level cash flow information at both the fund and deal levels. We further extend existing findings to international evidence on buyout and venture capital (VC) by testing the impact of various risk measures. We find that risk is an important driver of performance persistence and helps explain such persistence. We also find persistence in risk in private equity, in particular persistence in downside volatility for both buyout and VC funds. Finally, we document that fund performance is more strongly affected by fund managers able to minimize downside losses than selecting outperforming portfolio companies. This effect is strongest for buyout but, to a weaker extent, also holds for VC. Our results are further robust to controlling for legal factors at the country level.

The persistence of returns is a critical issue for investors in their choice of private equity managers. In this paper we analyse buyout performance persistence in new ways, using a unique database containing cash-flow data on 13,523 portfolio company investments by 865 buyout funds. We focus on unique realized deals and find that persistence of fund managers has substantially declined as the private equity sector has matured and become more competitive. Private equity has, therefore, largely conformed to the pattern found in most other asset classes in which past performance is a poor predictor of the future.

We present new evidence on the persistence of U.S. private equity (buyout and venture capital) funds using cash-flow data sourced from Burgiss's large sample of institutional investors. Previous research, studying largely pre-2000 data, finds strong persistence for both buyout and venture capital (VC) firms. Using ex post or most recent fund performance (as of June2019), we confirm the previous findings on persistence overall as well as for pre-2001 and post-2000 funds. However, when we look at the information an investor would actually have - previous fund performance at the time of fundraising rather than final performance - we find little or no evidence of persistence for buyouts, both overall and post-2000. For post-2000 buyouts, the conventional wisdom to invest in previously top quartile funds does not hold. Using previous fund PME at fundraising, we find modest persistence, but it is driven by bottom, not top quartile performance. On the other hand, persistence for VC funds persists even when using information available at the time of fundraising. Therefore, the conventional wisdom of investors holds for VC.

This paper investigates the performance of private equity partnerships using a data set of individual fund returns collected by Venture Economics. Over the sample period, average fund returns net of fees approximately equal the Samp;P 500 although there is a large degree of heterogeneity among fund returns. Returns persist strongly across funds raised by individual private equity partnerships. The returns also improve with partnership experience. Better performing funds are more likely to raise follow-on funds and raise larger funds than funds that perform poorly. This relationship is concave so that top performing funds do not grow proportionally as much as the average fund in the market. At the industry level, we show that market entry in the private equity industry is cyclical. Funds (and partnerships) started in boom times are less likely to raise follow-on funds, suggesting that these funds subsequently perform worse. Aggregate industry returns are lower following a boom, but most of this effect is driven by the poor performance of new entrants, while the returns of established funds are much less affected by these industry cycles. Several of these results differ markedly from those for mutual funds.

This paper investigates the performance of private equity partnerships using a data set of individual fund returns collected by Venture Economics. Over the sample period, average fund returns net of fees approximately equal the S&P 500 although there is a large degree of heterogeneity. Returns persist strongly across funds raised by individual private equity partnerships. Better performing funds are more likely to raise follow-on funds and raise larger funds than funds that perform poorly. This relationship is concave so that top performing funds do not grow proportionally as much as the average fund. Finally, market entry in private equity is cyclical. Funds (and partnerships) started in boom times are less likely to raise follow-on funds, suggesting that these funds subsequently perform worse. Several of these results differ markedly from those for mutual funds

During the past few decades, private equity (PE) has attracted considerable attention from investors, practitioners, and academicians. In fact, a substantial literature on PE has emerged. PE offers benefits for institutional and private wealth management clients including diversification and enhancement of risk-adjusted returns. However, several factors such as liquidity concerns, regulatory restrictions, and the lack of transparency limit the attractiveness of some PE options to investors. The latest volume in the Financial Markets and Investments Series, Private Equity: Opportunities and Risks offers a synthesis of the theoretical and empirical literature on PE in both emerging and developed markets. Editors H. Kent Baker, Greg Filbeck, Halil Kiymaz and their co-authors examine PE and provide important insights about topics such as major types of PE (venture capital, leveraged buyouts, mezzanine capital, and distressed debt investments), how PE works, performance and measurement, uses and structure, and trends in the market. Readers can gain an in-depth understanding about PE from academics and practitioners from around the world. Private Equity: Opportunities and Risks provides a fresh look at the intriguing yet complex subject of PE. A group of experts takes readers through the core topics and issues of PE, and also examines the latest trends and cutting-edge developments in the field. The coverage extends from discussing basic concepts and their application to increasingly complex and real-world situations. This new and intriguing examination of PE is essential reading for anyone hoping to gain a better understanding of PE, from seasoned professionals to those aspiring to enter the demanding world of finance.

We provide a systematic analysis of the properties of individual returns to wealth using twelve years of population data from Norway’s administrative tax records. We document a number of novel results. First, during our sample period individuals earn markedly different average returns on their financial assets (a standard deviation of 14%) and on their net worth (a standard deviation of 8%). Second, heterogeneity in returns does not arise merely from differences in the allocation of wealth between safe and risky assets: returns are heterogeneous even within asset classes. Third, returns are positively correlated with wealth: moving from the 10th to the 90th percentile of the financial wealth distribution increases the return by 3 percentage points - and by 17 percentage points when the same exercise is performed for the return to net worth. Fourth, wealth returns exhibit substantial persistence over time. We argue that while this persistence partly reflects stable differences in risk exposure and assets scale, it also reflects persistent heterogeneity in sophistication and financial information, as well as entrepreneurial talent. Finally, wealth returns are (mildly) correlated across generations. We discuss the implications of these findings for several strands of the wealth inequality debate.

Private equity fund managers (PEM, or the general partner/GP) exhibit certain performance persistence, or lack thereof, over time. Most scholarly research to date examines inter-fund performance persistence, or the performance at a fund level across multiple specific funds over time. This dissertation examines intra-fund performance, i.e., performance within a specific fund, and posits that investments made later in a specific private equity fund's lifespan will perform worse than earlier investments, reflecting agency cost in terms of residual loss to principals as a result of the direct and indirect compensation structures. Using ROIC (Return on Invested Capital) and the sequence in which investments are made in a fund as empirical evidence of these negative effects of the compensation and contractual arrangements common throughout the industry. This performance analysis will be done within each specific fund in consideration of the effects of both direct compensation from the current fund and indirect compensation expectations of the PEM from future funds. This dissertation relies on agency theory to explain the incentives and costs that lead to a negative relationship between the sequence of an investment in a fund's life and the ROIC of the specific investment. Concepts of risk sharing and information asymmetry, specifically from an agency theory perspective, and the misalignment of interested between investors and PEM support this hypothesis. The most notably areas impacted by this research relate to governance (both investors and public policy), compensation, and incentive structure of private equity funds.

In the last two decades, a number of private equity scholars have attempted to assess the ex-post returns (performance) of private equity funds (PEs). Such studies have produced both contradictory conclusions that have included a wide spread of abnormal realized returns ranging from -6% (Phalippou & Gottschalg, [2009]) to 32% (Cochrane, [2005]). Moreover, this research has been concerned with assessing realized returns instead of the required risk-premium. In addition, research in the last two decades has found a set of phenomena unique to the PE sector that influence performance and recent research suggests that illiquidity is the only additional factor to include in asset pricing models. This article seeks to help practitioners understand the drivers and determinants of risk-premium in PE investments and expected abnormal returns by critiquing extant research and explaining why contradictions persist in its results. We then propose a model which will allow practitioners to identify the nature of the drivers involved in PE investments thus enabling them to adopt a more rational approach in defining portfolios and assessing deals.

Successful private equity managers have funds that are often oversubscribed and provide persistent abnormal returns. Why don't successful managers increase fund size or fees? We argue that managers want to attract high quality entrepreneurs, while entrepreneurs want to match with high ability managers. However, observing fund performance does not allow entrepreneurs to distinguish a manager's ability from the quality of firms in the fund's portfolio. As a consequence, a fund manager may devote unobserved effort to select firms, and keep fund size small to limit the cost of effort, hoping to manipulate entrepreneurs' beliefs about his ability.