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Private Equity Investment Performance: A Bibliography of Independent Research
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Private Equity Investment Performance: A Bibliography of Independent Research


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This document shows 29 independent academic studies of the investment performance of private equity funds since the seminal 2005 study by Kaplan & Schoar. Each entry quotes from the most important …

This document shows 29 independent academic studies of the investment performance of private equity funds since the seminal 2005 study by Kaplan & Schoar. Each entry quotes from the most important findings, and links to an available online version of the paper.
Overall there is very clear evidence that venture capital funds have performed miserably since the late 1990s, but the evidence on buyout funds is mixed.
Very active research continues on questions such as (1) why private equity investment managers perform so poorly, (2) why investors continue to commit capital to such poorly performing investments, and (3) how large are the liquidity risks of private equity.

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  • 1. BIBLIOGRAPHY ON PERFORMANCE OF PRIVATE EQUITY INVESTMENT FUNDS Anget al. [2013]: Andrew Ang, Bingxu Chen, William N. Goetzmann, and LudovicPhalippou, “Estimating Private Equity Returns from Limited Partner Cash Flows,” November 2013. Our estimate suggests that private equity is, to a first approximation, a levered investment in small and mid-cap equities. … We find that in the first part of our sample period [1992]2008] the private equity premium contributed positively to returns and in the second period it detracted from returns. … Over the sample, the cumulated private equity premium is zero, so private equity has had an alpha of zero. Brown, Gredil& Kaplan [2013]: Gregory W. Brown, Oleg R. Gredil, and Steven N. Kaplan, “Do Private Equity Funds Game Returns?,” October 2013. We investigate whether there is evidence that private equity firms manipulate their NAV reports to investors. We find that some reported returns are abnormally high during periods when firms are likely to be marketing their new funds to prospective investors. … However, this fund timing pattern appears limited to the subset of underperforming funds. Moreover, it does not go unnoticed by the investors as firms reporting run-ups and reversals typically fail to raise a follow-on fund. … LPs appear to punish GPs for what looks like dishonest interim reporting in the midst of the GPs’ next fundraising by not providing capital to subsequent funds. Correspondingly, top performing GPs try to safeguard their long-term reputation from a ‘bad luck’ even in later stages of fund lives by reporting conservative NAVs, particularly when it does not jeopardize their high relative performance rank. For underperforming GPs, these long-term reputational concerns appear to be dominated by a short-term survival requirement to raise a next fund. Therefore, they are incentivized to boost to-date results to the extent the gap is not too large. Fan, Fleming & Warren [2013]: Frank Jian Fan, Grant Fleming, and Geoffrey J. Warren, “The Alpha, Beta, and Consistency of Private Equity Reported Returns,” Journal of Private Equity 16(4):21-30, Fall 2013. Over the full sample period, private equity returns display three factors: market beta of less than one, small transaction size and growth, and a four-quarter lag behind public markets. Buyout funds delivered alpha of about 5.5% per annum; venture capital performed poorly. Closer examination reveals that these estimates are inconsistent over time, cautioning against extrapolation from historical averages. Arcotet al. [2013]: Sridhar Arcot, ZsuzdannaFluck, José-Miguel Gaspar, and Ulrich Hege, “Fund Managers Under Pressure: Rationale and Determinants of Secondary Buyouts,” September 2013. Our analysis provides strong evidence that pressured funds are more likely to invest in secondary buyouts, pay higher valuation multiples, use lower leverage and rely less on syndicate finance. … On a subsample of completed deals we report that funds with higher average buy pressure have lower IRR and return multiple over the life of the fund. Our findings provide
  • 2. strong support for the prediction…that PE funds with substantial unspent capital late in their investment period are more likely to make negative NPV investments. Harris, Jenkinson& Kaplan [2013]: Robert S. Harris, Tim Jenkinson, and Steven N. Kaplan, “Private Equity Performance: What Do We Know?,” July 2013. First, it seems likely that buyout funds have outperformed public markets, particularly the S&P 500, net of fees and carried interest, in the 1980s, 1990s, and 2000s. Our estimates imply that each dollar invested in the average fund returned at least 20% more than a dollar invested in the S&P 500. This works out to an outperformance of at least 3% per year. … Second, VC funds outperformed public markets substantially until the late 1990s, but have underperformed since. … Since 2000, the average VC fund has underperformed public markets by about 5% over the life of the fund. … Third, vintage year performance for buyout and VC funds decreases with the amount of aggregate capital committed to the relevant asset class, particularly for absolute performance, but also for performance relative to public markets. … Finally, although it is natural to benchmark private equity returns against public markets, investing in a portfolio of private equity funds across vintage years inevitably involves uncertainties and potential costs related to the long-term commitment of capital, uncertainty of cash flows and the liquidity of holdings that differ from those in public markets. While the average ou-performance of private equity we find is large, further research is required to calibrate the extent of the premia investors required to bear these risks. Sensoy, Wang &Weisbach [2013]: Berk A. Sensoy, Yingdi Wang, and Michael S. Weisbach, “Limited Partner Performance and the Maturing of the Private Equity Industry,” May 2013. We find that the superior performance of endowment investors in the 1991-1998 period, documented in prior literature, is mostly due to their greater access to the top-performing venture capital partnerships. In the subsequent 1999-2006 period, endowments no longer outperform, and neither have greater access to funds that are likely to restrict access nor make better investment selections than other types of institutional investors. Phalippou [2013]: LudovicPhalippou, “Yale’s Endowment Returns: Case Study in GIPS Interpretation Difficulties,” Journal of Alternative Investments 15(4):97-103, Spring 2013. For nonpublic companies, the Global Investment Performance Standard recommends using a since-inception IRR to report performance. This article shows that such a figure can be misleading. The return of the Yale Endowment in private equity is taken as a case study. It is shown that an investor with a long and “average” track record in venture capital computing its return following the GIPS recommendations would display at 30% return over a long horizon and that this number would hardly change in any year from 2000 to 2010, which is similar to what is shown in the annual reports of Yale Endowment. Jenkinson, Sousa &Stucke [2013]: Tim Jenkinson, Miguel Sousa, and RϋdigerStucke, “How Fair are the Valuations of Private Equity Funds?,” February 2013.
  • 3. During fundraising periods the valuations tend to be inflated compared to other periods in the life of the fund. This has large effects on reported interim performance measures that appear in fundraising documents. We find a distinctive pattern of abnormal valuations which matches quite closely the period up to the first close of the follow on fund. It is hard to rationalize the pattern we observe except as a positive bias in valuation during fundraising. We find that the performance figures reported by funds during fundraising have little power to predict ultimate returns. … In sum, these results suggest that investors should put little, or no, weight on the IRRs that they read in marketing documents when deciding whether to invest in a follow-on fund. … Perhaps all private equity fundraising documents should contain the caveat ‘interim performance is no guarantee of final performance.’ Degeorge, Martin &Phalippou [2013]: Francois Degeorge, Jens Martin, and LudovicPhalippou, “Is the Rise of Secondary Buyouts Good News for Investors?,” January 2013. Private equity firms increasingly sell their portfolio companies to other private equity firms. We show that these “secondary buyouts” are costly for institutional investors, both because the induced transaction costs are large and because secondary buyouts significantly underperform primary buyouts. Da Rin, Hellmann &Puri [2013]: Marco Da Rin, Thomas Hellmann, and ManjuPuri, “A Survey of Venture Capital Research,” Chapter 8 of Handbook of the Economics of Finance, 2013. While different studies obtain somewhat different estimates of the net returns, there is an emerging consensus that average returns of VC funds do not exceed market returns. Moreover, there is considerable dispersion and skew. While the net returns of the best VC funds are clearly very high, the median VC fund rarely beats the market, and the lower tail of the distribution can generate large negative returns. What is even more concerning is that these estimates of returns do not account for systematic risk and lack of liquidity. Franzoni, Nowak &Phalippou [2009]: Francesco Franzoni, Eric Nowak, and LudovicPhalippou, “Private Equity Performance and Liquidity Risk,” Journal of Finance 67(6): 2341–2373, December 2012. Once the risk premia on the book-to-market factor and the size factor are taken into account, the alpha drops to about 3.1%, which is still economically (although not statistically) significant. In the model with liquidity risk, the premia on the four factors entirely account for average private equity returns. The alpha is virtually zero, both economically and statistically, while the risk premium and the cost of capital are about 18% and 24% per year, respectively. Our main conjecture is that the relation between market liquidity and private equity returns is a reflection of the effect of funding liquidity on private equity performance. … This indicates that funding liquidity is an important source of liquidity risk in private equity. Our results provide practitioners with a hurdle rate to evaluate private equity. Using such a benchmark, they can assess the NPV of their track record. The cost of capital of about 18% in
  • 4. excess of the risk-free rate that we estimate is in sharp contrast to the widely used hurdle rate of 8%. In addition, our results may call current compensation practices into question. Fund managers and, oftentimes, the private equity team within the investor’s organization receive performance-based compensation if they achieve returns above 8% per annum, but this hurdle rate seems low in view of our findings. Knowing the risk profile of private equity investments is also an important point for portfolio risk management. At times of liquidity crisis, these investments may not offer the risk diversification that investors expect from them. Phalippou [2012a]: LudovicPhalippou, “Performance of Buyout Funds Revisited?,” November 2012. This study shows that buyout funds mainly invest in small and value companies. Adjusting for the size premium brings the average buyout fund return in line with small cap indices and with the oldest small-cap passive mutual fund. If the benchmark is changed to small and value indices, and is levered up, the average buyout fund underperforms by -3.1% per annum. Harris, Jenkinson&Stucke [2012]: Robert Harris, Tim Jenkinson, and RϋdigerStucke, “Are Too Many Private Equity Funds Top Quartile?,” Journal of Applied Corporate Finance 24(4):77-89, Fall 2012. The state of affairs in private equity benchmarking leaves much to be desired. … As better data become available, there will be large opportunity to tackle the inherent difficulties in assessing returns to illiquid assets such as investments in private equity. Measures such as public market equivalents offer a number of advantages compared to traditional IRRs and money multiplies, but require detailed cash flow data to be calculated properly. … Even if private equity produces a return above that on public markets, is that gap sufficient to compensate for the risk and illiquidity? Mozes& Fiore [2012]: Haim A. Mozes and Andrew Fiore, “Private Equity Performance: Better Than Commonly Believed,” Journal of Private Equity 15(3):19-32, Summer 2012. The primary results indicate that (1) buyout funds have better standalone long-term risk-return characteristics than public equity markets and they performan counter-cyclically to public equity markets; (2) when venture funds are combined with buyouts funds, the resulting mix provides a more attractive alternative to public equity markets than buyout funds along provide; and (3) venture funds’ higher absolute returns as compared to buyout funds and public equity markets are restricted to a few vintages and a small number of big winners in those vintages. Mulcahy, Weeks & Bradley [2012]: Diane Mulcahy, Bill Weeks, and Harold S. Bradley, “’We Have Met the Enemy…and He is Us’: Lessons from Twenty Years of the Kauffman Foundation’s Investments in Venture Capital Funds and the Triumph of Hope over Experience,” May 2012. Venture capital has delivered poor returns for more than a decade. VC returns haven’t significantly outperformed the public market since the late 1990s, and, since 1997, less cash has been returned to investors than has been invested in VC. … Limited Partners—foundations,
  • 5. endowments, and state pension funds—invest too much capital in underperforming venture capital funds on frequently mis-aligned terms. Our research suggests that investors like us succumb time and again to narrative fallacies, a well-studied behavioral finance bias. We found in our own portfolio that: Only twenty of 100 venture funds generated returns that beat a public-market equivalent by more than 3 percent annually, and half of those began investing prior to 1995. The majority of funds—sixty-two out of 100—failed to exceed returns available from the public markets, after fees and carry were paid. There is not consistent evidence of a J-curve in venture investing since 1997; the typical Kauffman Foundation venture fund reported peak internal rates of return (IRRs) and investment multiples early in a fund’s life (while still in the typical sixty-month investment period), followed by serial fundraising in month twenty-seven. Only four of thirty venture capital funds with committed capital of more than $400 million delivered returns better than those available from a publicly traded small cap common stock index. Of eighty-eight venture funds in our sample, sixty-six failed to deliver expected venture rates of return in the first twenty-seven months (prior to serial fundraises). The cumulative effect of fees, carry, and the uneven nature of venture investing ultimately left us with sixty-nine funds (78 percent) that did not achieve returns sufficient to reward us for patient, expensive, long-term investing. Phalippou [2012b]: LudovicPhalippou, “A Comment on Recent Evidence of Private Equity Performance,” March 2012. Claims are regularly made that private equity funds in aggregate generate significant alpha for their investors. Recent findings have been presented as supporting such a claim. … This paper considers recent estimates derived by Robinson &Sensoy [2011], Harris, Jenkinson& Kaplan [2013] and Higson&Stucke [2012]. With access to up-to-date and high-quality data, these studies show an outperformance of the S&P 500 index by buyout funds. Although neither study shows the yearly size-weighted outperformance, their numbers indicate that it is around 3% per annum. However, this note raises several issues that still need to be addressed before concluding that private equity generated a positive alpha. The main issue is probably the existence of a strong size effect in recent years: the S&P 500 index significantly underperformed small cap and mid cap stocks, with are the size categories in which private equity funds mainly invest. Adjusting for size, each of the three studies show private equity returns that are virtually identical to those of public stocks. This means that recent evidence seems to confirm rather than infirm the implications derived by previous research effort. Higson&Stucke [2012]: Chris Higson and RϋdigerStucke, “The Performance of Private Equity,” March 2012.
  • 6. For almost all vintage years since 1980, U.S. buyout funds have significantly outperformed the S&P 500. Liquidated funds from 1980 to 2000 have delivered excess returns of about 450 basis points per year. … The cross-sectional variation is considerable with just over 60% of all funds doing better than the S&P, and excess returns being driven by top-decile rather than topquartile funds. … However, we find a significant downward trend in absolute returns over all 29 vintage years. These results need extending in several ways. Perhaps the biggest question is the outturn of the funds raised since the mid-2000s in the lead up to the recession. A reliable judgment on this needs data that will take years to emerge. The more pressing issue is the question of benchmark. Since the principal focus of this paper was the measurement of returns, we adopted the S&P 500 as a benchmark, consistent with the existing literature. But hard conclusions about whether or not the U.S. buyout industry has created alpha for its investors requires further research on the appropriate benchmark. Finally, appropriate adjustments for risk will be necessary to draw a definitive conclusion on the risk-adjusted performance of U.S. buyout funds. Robinson &Sensoy [2012]: David T. Robinson and Berk A. Sensoy, “Do Private Equity Managers Earn their Fees? Compensation, Ownership, and Cash Flow Performance,” March 2012. During fundraising booms, percentage management fees increase and GPs’ compensation shifts toward the fixed component, consistent with greater GP bargaining power and a preference for fixed compensation. Moreover, GPs who receive fees on invested capital tend to exit investments (and thus lower their fee basis) more slowly, while GPs tend to accelerate the pace of exit immediately after they become eligible to receive carried interest. These findings indeed suggest that the fundamental information asymmetry between GPs and LPs allows GPs to game the contractual provisions that are partially in place to protect the LPs’ return, and they certainly illustrate that GPs earn more in boom periods. However, we find no evidence that high-fee funds underperform on a net-of-fee basis. Robinson &Sensoy [2011]: David T. Robinson and Berk A. Sensoy, “Cyclicality, Performance Measurement, and Cash Flow Liquidity in Private Equity,” November 2011. Liquidated buyout funds have an average TVPI of 1.57, an average PME of 1.18, and an average tailored PME of 1.10. For venture funds, the progression is from 1.44 to 1.03 to 1.06. Medians display similar patterns. Overall, our results on fund size and performance are consistent with Kaplan and Schoar [2005]. If anything, they suggest that the poor relative performance of very large funds they document has only worsened since their sample period. Phalippou [2011]: LudovicPhalippou, “Why is the Evidence on Private Equity Performance so Confusing?,” September 2011.
  • 7. Selecting a sub-sample such as liquidated funds may create a bias because better funds tend to liquidate more quickly. It is important to stress that the methodological choices made to compute industry benchmarks are reasonably and understandable at first sight. In NAVs were unbiased estimates of market values, than an end-to-end approach would often lead to the right answer. Even the use of IRR would be reasonable if there are no large early capital distributions. The point of this article is to show that the industry methodology can generate significant biases, misleading figures and unstable numbers. Harris, Jenkinson&Stucke [2010]: Robert Harris, Tim Jenkinson, and RϋdigerStucke, “A White Paper on Private Equity Data and Research,” December 2010. Overall, the recent research suggests that private equity’s attractiveness is likely overstated by looking at reported returns. The level of returns is subject to debate and risk measures are often understated. Cumming &Walz [2010]: Douglas Cumming and UweWalz, “Private Equity Returns and Disclosure Around theWorld,” Journal of International Business Studies 41(4):727–754, May 2010. Private equity funds may overstate the value of their investments in order to attract new investors into follow-up funds. … Using evidence from 39 countries, we show that there are significant systematic biases in managers’ reporting of fund performance. We find that these biases depend on the accounting and legal environment in a country, and on proxies for the degree of information asymmetry between institutional investors and private equity fund managers. Metrick& Yasuda [2010]: Andrew Metrick and Ayako Yasuda, “The Economics of Private Equity Funds,” Review of Financial Studies 23(6):2303-2341, 2010. Among our sample of funds, about two-thirds of expected revenue comes from fixed-revenue components that are not sensitive to performance. Ang, Goetzmann& Schaefer [2009]: Andrew Ang, William N. Goetzmann, and Stephen M. Schaefer, “Evaluation of Active Management of the Norwegian Government Pension Fund – Global,” December 2009. There is surprisingly little convincing evidence of superior risk-adjusted returns to private equity and venture capital. Despite claims that top managers can produce consistent high returns, the current data are not conclusive on this point. Phalippou [2009a]: LudovicPhalippou, “The Hazards of Using IRR to Measure Performance: The Case of Private Equity,” September 2009.
  • 8. When raising capital, private equity funds provide track records expressed in terms of IRR and cash multiples exclusively. … In this article, it is shown that IRR is probably the worst performance metric one may use in an investment context. It exaggerates the variation across funds, exaggerates the performance of the best funds, can be readily inflated and provides perverse incentives to fund managers. Phalippou&Gottschalg [2009]: LudovicPhalippou and Oliver Gottschalg, “The Performance of Private Equity Funds,” Review of Financial Studies 22(4):1747-1776, April 2009. The performance of private equity funds as reported by industry associations and previous research is overstated. A large part of performance is driven by inflated accounting valuation of ongoing investments and we find a bias toward better performing funds in the data. We find an average net-of-fees fund performance of 3% per year below that of the S&P 500. Adjusting for risk brings the underperformance to 6% per year. We estimate fees to be 6% per year. Kaplan &Strömberg [2009]: Steven N. Kaplan and Per Strömberg, “Leveraged Buyouts and Private Equity,” Journal of Economic Perspectives 23(1):121-146, Winter 2009. What will happen to funds and transactions completed in the recent private equity boom of 2005 to mid-2007? It seems plausible that the ultimate returns to private equity funds raised during these years will prove disappointing because firms are unlikely to be able to exit the deals from this period at valuations as high as the private equity firms paid to buy the firms. It is also plausible that some of the transactions undertaken during the boom were less driven by the potential of operating and governance improvements, and more driven by the availability of debt financing, which also implies that the returns on these deals will be disappointing. Phalippou [2009b]: LudovicPhalippou, “Beware of Venturing into Private Equity,” Journal of Economic Perspectives 23(1):147-166, Winter 2009. The average private equity buyout fund charges the equivalent of 7 percent fees per year, despite a return below that of the Standard & Poor’s 500. Why are the payments to private equity funds so large? Why does the marginal investor buy buyout funds? I explore one potential—and probably the most controversial—answer: that is, some investors are fooled. I show that the fee contracts are opaque. The compensation contracts for buyout funs typically imply lower fees at first sight than actually occur. The larger fees are generated by what seem like minor details in these contracts. Investors may thus underestimate the impact of fees. … Finally, to further understand the potential agency conflicts between buyout funds and their investors, I discuss a few features of buyout contracts that exacerbate conflicts of interest, rather than mitigate. For example, several contract clauses provide incentives that can distort the optimal of investments, their leverage, and their size. Driessen, Lin &Phalippou [2007]: JoostDriessen, Tse-Chun Lin, and LudovicPhalippou, “Estimating the Performance and Risk Exposure of Private Equity Funds: A New Methodology,” Network for Studies on Pensions, Aging and Retirement Discussion Paper 2007-023, August 2007.
  • 9. Using a dataset comprising 797 mature private equity funds spanning 24 years, we find a high market beta for venture capital funds and a low beta for buyout funds, and report evidence that private equity risk-adjusted returns are surprisingly low. … The CAPM specification gives a beta of 2.18 and a significantly negative alpha of about -15% per year for the VC funds. … When the two Fama-French factors are added, alpha increases to -10% per year because VC funds overall are similar to small growth stocks, which have low performance over this time period. BO funds are found to have a much lower beta of 0.09 and a slightly positive alpha. However, adding SMB and HML increases the beta to 1.04 and also leads to a significantly negative alpha of -9% per year. … We also show that the NAVs reported near the end of the typical fund life are highly upward biased estimates of the market value of funds. Specifically, using a regression approach, we find that the final market values of funds that are 10 to 13 years old are only 28.7% of their self-reported net asset values. Conroy & Harris [2007]: Robert M. Conroy and Robert S. Harris, “How Good are Private Equity Returns?,” Journal of Applied Corporate Finance 19(3):96-108, Summer 2007. The bottom line of our analysis is that the average net returns (after management fees) to investors in private equity have not been nearly as attractive on a risk-adjusted basis as many have assumed. Risks are often understated and returns overstated, owing large part to the way in which the assets of private equity firms are periodically valued and disclosed. … The root causes of the overstatement are biases in reported data when assets are not traded. Our results suggest that ‘average’ returns in private equity may not be sufficient to justify the illiquidity and costs associated with adding the asset class to one’s portfolio Moreover, our analysis fails to take account of some key practical attributes of private equity investing. The ‘time weighted’ returns used to create standard indices for asset classes such as bonds and public stocks do not mirror some of the dynamics of private equity investing. Funds have finite lives, the general partner decides when to call capital from investors and there are substantial interim cash flows paid out to investors when the fund sells assets. Unlike the case in public markets, investors in private equity may not be able to put their money to work quickly and reinvestment opportunities may be limited. Phalippou&Zollo [2005]: LudovicPhalippou and Maurizio Zollo, “What Drives Private Equity Fund Performance?,” November 2005. Using a novel and comprehensive database on both US and EU private equity funds and their underlying investments, we study the drivers of private equity fund performance. First, we study whether their hedging properties are attractive enough to justify their low performance. We document that fund performance co-varies positively with both business cycles and stockmarket cycles, an unattractive property. We also find that private equity funds—like hedge funds—are exposed to tail risk. Kaplan &Schoar [2005]: Steven N. Kaplan and Antoinette Schoar, “Private Equity Performance: Returns, Persistence, and Capital Flows,” Journal of Finance 60(4):1791-1823, August 2005.
  • 10. Over the entire sample period (1980-1997), average fund returns net of fees are roughly equal to those of the S&P 500. … We acknowledge, however, that the average return results are potentially biased because we do not control for differences in market risk and because of possible sample selection biases. … Finally, we find some evidence that fund and partnerships that are raised in boom times are less likely to raise follow-on funds, suggesting that these funds perform worse.