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Smart Institutions, Foolish Choices: The Limited Partner Performance Puzzle

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Author Info
JOSH LERNER
ANTOINETTE SCHOAR
WAN WONGSUNWAI

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Abstract

The returns that institutional investors realize from private equity differ dramatically across institutions. Using detailed, hitherto unexplored records, we document large heterogeneity in the performance of investor classes: endowments' annual returns are nearly 21% greater than average. Analysis of reinvestment decisions suggests that endowments (and to a lesser extent, public pensions) are better than other investors at predicting whether follow-on funds will have high returns. The results are not primarily due to endowments' greater access to established funds, since they also hold for young or undersubscribed funds. Our results suggest that investors vary in their sophistication and potentially their investment objectives. Copyright 2007 by The American Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2007.01222.x
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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 62 (2007)
Issue (Month): 2 (04)
Pages: 731-764
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Handle: RePEc:bla:jfinan:v:62:y:2007:i:2:p:731-764

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Colin Mayer & Koen Schoors & Yishay Yafeh, 2003. "Sources of Funds and Investment Activities of Venture Capital Funds: Evidence from Germany, Israel, Japan and the UK," NBER Working Papers 9645, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March. [Downloadable!] (restricted)
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  3. Lerner, Josh & Schoar, Antoinette, 2004. "The illiquidity puzzle: theory and evidence from private equity," Journal of Financial Economics, Elsevier, vol. 72(1), pages 3-40, April. [Downloadable!] (restricted)
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  4. Kaplan, Steve & Schoar, Antoinette, 2004. "Private Equity Performance: Returns, Persistence and Capital Flows," Working papers 4446-03, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
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  5. Thomas Hellman & Laura Lindsey & Manju Puri, 2004. "Building Relationships Early: Banks in Venture Capital," NBER Working Papers 10535, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December. [Downloadable!] (restricted)
  7. Barberis, Nicholas & Shleifer, Andrei, 2003. "Style investing," Journal of Financial Economics, Elsevier, vol. 68(2), pages 161-199, May. [Downloadable!] (restricted)
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  8. Paul A. Gompers & Josh Lerner, 1999. "What Drives Venture Capital Fundraising?," NBER Working Papers 6906, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Paul A. Gompers & Andrew Metrick, 2001. "Institutional Investors And Equity Prices," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 229-259, February. [Downloadable!] (restricted)
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  10. Gompers, Paul & Lerner, Josh, 1999. "An analysis of compensation in the U.S. venture capital partnership1," Journal of Financial Economics, Elsevier, vol. 51(1), pages 3-44, January. [Downloadable!] (restricted)
  11. Kenneth A. Froot & Melvyn Teo, 2004. "Equity Style Returns and Institutional Investor Flows," NBER Working Papers 10355, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. James M. Poterba, 1989. "Venture Capital and Capital Gains Taxation," NBER Working Papers 2832, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Gromb, Denis & Vayanos, Dimitri, 2002. "Equilibrium and welfare in markets with financially constrained arbitrageurs," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 361-407. [Downloadable!] (restricted)
  14. Gompers, Paul & Lerner, Josh, 2000. "Money chasing deals? The impact of fund inflows on private equity valuation," Journal of Financial Economics, Elsevier, vol. 55(2), pages 281-325, February. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Oliver, Gottschalg & Ludovic, Phalippou, 2006. "The performance of private equity funds," Les Cahiers de Recherche 852, Groupe HEC. [Downloadable!]
  2. Zwart, G.J. de & Frieser, B. & Dijk, D.J.C. van, 2007. "A Recommitment Strategy for Long Term Private Equity Fund Investors," Research Paper ERS-2007-097-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
  3. Boyan Jovanovic & Balà zs Szentes, 2007. "On the Return to Venture Capital," NBER Working Papers 12874, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Axelson, Ulf & Strömberg, Per Johan & Weisbach, Michael, 2007. "Why are Buyouts Leveraged? The Financial Structure of Private Equity Firms," CEPR Discussion Papers 6133, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Cumming, Douglas & Johan, Sofia, 2006. "Corporate social responsibility: domestic and international private equity institutional investment," Discussion Paper 2, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
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  6. Cumming, Douglas & Johan, Sofia, 2006. "Regulatory harmonization and the development of private equity markets," Discussion Paper 1, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
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  7. Groh, Alexander P. & Liechtenstein, Heinrich & Canela, Miguel A., 2008. "Limited partners' perceptions of the Central Eastern European venture capital and private equity market," IESE Research Papers D/727, IESE Business School. [Downloadable!]
  8. Richard Kum-yew Lai, 2005. "Why Funds of Funds?," Finance 0509005, EconWPA. [Downloadable!]
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  9. Cronqvist, Henrik & Fahlenbrach, Rüdiger, 2007. "Large Shareholders and Corporate Policies," SIFR Research Report Series 60, Swedish Institute for Financial Research. [Downloadable!]
  10. Ulf Axelson & Per Stromberg & Michael S. Weisbach, 2007. "Why are Buyouts Levered: The Financial Structure of Private Equity Funds," NBER Working Papers 12826, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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