The performance of private equity funds

Using a unique and comprehensive dataset, the authors show that the sample of mature private equity funds used in previous research and as an industry benchmark is biased towards better performing funds. They also show that accounting values reported by these mature funds for non exited investments are substantial and they provide evidence that they mostly represent living dead investments. After correcting for sample bias and overstated accounting values, average fund performance changes from slight over performance to substantial underperformance of -3.83% per year with respect to the S&P 500. Assuming a typical fee structure, they find that gross-of-fees these funds outperform by 2.96% per year. The authors conclude that the stunning growth in the amount allocated to this asset class cannot be attributed to genuinely high past performance. They discuss several potentially misleading aspects of standard performance reporting and discuss some of the added benefits of investing in private equity funds as a first step towards an explanation for our results.Private equity funds; performance

The cost of mass gatherings during a pandemic

In June 2020, the U.S., unlike other regions of the world, faced a surge in cases of COVID-19. Immediately prior to this wave of cases, the largest mass protests in U.S. history took place. We show that when holding other factors constant, COVID-19 cases increased most in places where more demonstrations occurred. We exploit variation in rainfall during the protest period as an exogenous source of variation in attendance. We find that good weather coincides with both more people protesting and more subsequent COVID-19 cases and deaths. Mass gatherings during a pandemic thus lead to more contraction and fatalities of COVID-19, and we quantify these effects

Giants at the Gate: On the Cross-section of Private Equity Investment Returns

We examine the determinants of private equity returns using a newly constructed database of 7,500 investments worldwide over forty years. The median investment IRR (PME) is 21% (1.3), gross of fees. One in ten investments goes bankrupt, whereas one in four has an IRR above 50%. Only one in eight investments is held for less than 2 years, but such investments have the highest returns. The scale of private equity firms is a significant driver of returns: investments held at times of a high number of simultaneous investments underperform substantially. The median IRR is 36% in the lowest scale decile and 16% in the highest. Results survive robustness tests. Diseconomies of scale are linked to firm structure: independent firms, less hierarchical firms, and those with managers of similar professional backgrounds exhibit smaller diseconomies of scale.Private Equity, investment, LBOs, Buyouts

Investor Size and Division of Labor: Evidence from a Survey of Private Equity Limited Partners

Using a comprehensive survey, we show that investors with a larger capital allocation to private equity are more specialized and have a wider scope of due diligence and investment activities. Smaller investors tend to free ride on decisions made by larger investors. Other investor characteristics (experience, type, location, compensation structure, number of funds under management) play no role. These results are consistent with increasing returns to scale for due diligence, and with the savings generated by increased scale going into increasing scope rather than into cost reduction. Our findings provide an explanation for the observed outperformance of larger investors when it comes to investing in private equity

Private Equity Portfolio Company Fees

In private equity, General Partners (GPs) may receive fee payments from companies whose board they control. This paper describes the related contracts and shows that these fee payments sum up to $20 billion evenly distributed over the last twenty years, representing over 6% of the equity invested by GPs on behalf of their investors. Fees do not vary according to business cycles, company characteristics, or GP performance. Fees vary significantly across GPs and are persistent within GPs. GPs charging the least raised more capital post financial crisis. GPs that went public distinctively increased their fees prior to that event. We discuss how results can be explained by optimal contracting versus tunneling theories

Capital commitment

Twelve trillion dollars are allocated to private market funds that require outside investors to commit to transferring capital on demand. We show within a novel dynamic portfolio allocation model that ex-ante commitment has large effects on investors’ portfolios and welfare, and we quantify those effects. Investors are under-allocated to private market funds and are willing to pay a larger premium to adjust the quantity committed than to eliminate other frictions, like timing uncertainty and limited tradability. Perhaps counter-intuitively, commitment risk premiums increase with secondary market liquidity and they do not disappear when investments are spread over many funds

Estimating Private Equity Returns from Limited Partner Cash Flows

We introduce a methodology to estimate the historical time series of returns to investment in private equity. The approach is quite general, requires only an unbalanced panel of cash contributions and distributions accruing to limited partners, and is robust to sparse data. We decompose private equity returns into a component due to traded factors and a time-varying private equity premium. We find strong cyclicality in the premium component that differs according to fund type. The time-series estimates allow us to directly test theories about private equity cyclicality, and we find evidence in favor of the Kaplan and Strömberg (2009) hypothesis that capital market segmentation helps to determine the private equity premium

Estimating Private Equity Returns from Limited Partner Cash Flows

We introduce a methodology to estimate the historical time series of returns to investment in private equity. The approach is quite general, requires only an unbalanced panel of cash contributions and distributions accruing to limited partners, and is robust to sparse data. We decompose private equity returns into a component due to traded factors and a time-varying private equity premium. We find strong cyclicality in the premium component that differs according to fund type. The time-series estimates allow us to directly test theories about private equity cyclicality, and we find evidence in favor of the Kaplan and Strömberg (2009) hypothesis that capital market segmentation helps to determine the private equity premium

A New Method to Estimate Risk and Return of Non-Traded Assets from Cash Flows: The Case of Private Equity Funds

We develop a new GMM-style methodology with good small-sample properties to assess the abnormal performance and risk exposure of a non-traded asset from a cross-section of cash flow data. We apply this method to a sample of 958 mature private equity funds spanning 24 years. Our methodology uses actual cash flow data and not intermediary self-reported Net Asset Values. In addition, it does not require a distributional assumption for returns. For venture capital funds, we find a high market beta and significant under-performance. For buyout funds, we find a low beta and no abnormal performance, but the sample is small. Larger funds have higher returns due to higher risk exposures and not higher alphas. We also find that Net Asset Values significantly overstate fund market values for the subset of mature and inactive funds.

Corporate control and employee satisfaction

We analyze one million employee reviews in the US, and find that employees are more satisfied in privately held companies than in publicly held companies, and that changes in corporate ownership have minor effects on employee satisfaction except for two cases. Employee satisfaction plummets after a Private Equity firm takes control for the first time (Primary Buy-Out), as documented in the literature, but the largest effect is the decrease in satisfaction after a Venture Capitalist (VC) exits. These effects are not driven by firm age, size, or industry. We estimate a Structural Topic Model. Before a VC exits, employees are abnormally satisfied, and gripe about the fast changes occurring at the company. After VC exits, employees complain about senior management becoming more controlling and less supportive. Our findings bode well with the theories of Venture Capital as a company standardization device. Finally, we show how ChatGPT can generate an automated human-like summary of employee views which corroborate and substantiate these results