Private Equity Performance: Returns, Persistence, and Capital Flows

This paper investigates the performance and capital inflows of private equity partnerships. Average fund returns (net of fees) approximately equal the S&P 500 although substantial heterogeneity across funds exists. Returns persist strongly across subsequent funds of a partnership. Better performing partnerships are more likely to raise follow-on funds and larger funds. This relationship is concave, so top performing partnerships grow proportionally less than average performers. At the industry level, market entry and fund performance are procyclical; however, established funds are less sensitive to cycles than new entrants. Several of these results differ markedly from those for mutual funds. THE PRIVATE EQUITY INDUSTRY, primarily venture capital (VC) and buyout (LBO) investments, has grown tremendously over the last decade. While investors committed less than $10 billion to private equity partnerships in 1991, they committed more than $180 billion at the peak in 2000 (see Jesse Reyes, Private Equity Overview and Update 2002). Despite the increased investment in the private equity asset class and the potential importance of private equity investments for the economy as a whole, we have only a limited understanding of private equity returns, capital flows, and their interrelation. One of the main obstacles has been the lack of available data. Private equity, as the name suggests, is largely exempt from public disclosure requirements. In this paper, we make use of a novel data set of individual fund performance collected by Venture Economics (VE).1 The VE data set is based on voluntary reporting of fund returns by the private equity firms (or general partners (GPs)) as well as their limited partners (LPs). We study three issues with this data set that have not been closely examined before. First, we investigate the performance of private equity funds. On average, LBO fund returns net of fees are slightly less than those of the S&P 500; VC ∗Kaplan is at the University of Chicago Graduate School of Business and at the NBER; Schoar is at the Sloan School of Management at MIT, and at the NBER, and the CEPR. We thank Ken Morse at the MIT Entrepreneurship Center and Jesse Reyes from Venture Economics for making this project possible. We thank Eugene Fama, Laura Field Josh Lerner, Alexander Ljungqvist, Jun Pan, Matt Richardson, Rex Sinquefield, Rob Stambaugh (the editor), Rebecca Zarutskie, an anonymous referee, and seminar participants at Alberta, Arizona State, Chicago, MIT, NBER Corporate Finance, NYSE-Stanford Conference on Entrepreneurial Finance and IPOs, NYU, and USC for helpful comments. Data for this project were obtained from the VentureExpert database collected by Venture Economics. 1 We thank Jesse Reyes from VE for making the data available.