Private Equity Returns: Persistence and Capital Flows

This paper investigates individual fund returns in the private equity industry using a unique data set collected by Venture Economics. We find a large degree of heterogeneity among fund returns. Those returns persist strongly across funds by private equity firms. The returns also improve with firm experience. Better performing funds are more likely to raise follow-on funds and raise larger funds than more poorly performing firms. This relationship is concave so that top performing funds grow more slowly than the market average. Finally, we find that funds that are raised in boom times (and firms that are started in boom times) are less likely to raise a follow-on fund, suggesting that these funds perform worse. Several of these results differ substantially from those for mutual funds. ∗Very Preliminary draft. Please do not quote without authors’ permission. University of Chicago Graduate School of Business, NBER; MIT Sloan School of Management, NBER and CEPR. Addresses: 1101 E. 58th Street, Chicago, IL 60637; 50 Memorial Drive, E52-447, Cambridge, MA 02142. E-mail: [email protected]; [email protected]. We thank Ken Morse and Jesse Reyes for making this project possible. We thank seminar participants at the University of Alberta and NYU. All data for this project were obtained from the VentureExpert database collected by Venture Economics.