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Limited partner performance and the maturing of the private equity industry

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  • Sensoy, Berk A.
  • Wang, Yingdi
  • Weisbach, Michael S.

Abstract

We evaluate the performance of limited partners׳ (LPs׳) private equity investments over time. Using a sample of 14,380 investments by 1,852 LPs in 1,250 buyout and venture capital funds started between 1991 and 2006, we find that the superior performance of endowment investors in the 1991–1998 period, documented by 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, no longer have greater access to funds that are likely to restrict access, and do not make better investment selections than other types of institutional investors. Nevertheless, all investor types׳ private equity investments continue to outperform public markets on average. We discuss how these results are consistent with the general maturing of the industry, as private equity has transitioned from a niche, poorly understood area to a ubiquitous part of institutional investors׳ portfolios.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 112 (2014)
Issue (Month): 3 ()
Pages: 320-343

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Handle: RePEc:eee:jfinec:v:112:y:2014:i:3:p:320-343

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Private equity performance; Institutional investors;

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References

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  1. Ji-Woong Chung & Berk A. Sensoy & Lea H. Stern & Michael S. Weisbach, 2010. "Pay for Performance from Future Fund Flows: The Case of Private Equity," NBER Working Papers 16369, National Bureau of Economic Research, Inc.
  2. Shourun Guo & Edith S. Hotchkiss & Weihong Song, 2011. "Do Buyouts (Still) Create Value?," Journal of Finance, American Finance Association, vol. 66(2), pages 479-517, 04.
  3. Kaplan, Steven, 1989. "The effects of management buyouts on operating performance and value," Journal of Financial Economics, Elsevier, vol. 24(2), pages 217-254.
  4. Jonathan B. Berk & Richard C. Green, 2002. "Mutual Fund Flows and Performance in Rational Markets," FAME Research Paper Series rp100, International Center for Financial Asset Management and Engineering.
  5. Andrew Metrick, 2010. "The Economics of Private Equity Funds," Review of Financial Studies, Society for Financial Studies, vol. 23(6), pages 2303-2341, June.
  6. Gompers, Paul & Lerner, Josh, 1999. "An analysis of compensation in the U.S. venture capital partnership," Journal of Financial Economics, Elsevier, vol. 51(1), pages 3-44, January.
  7. 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.
  8. Josh Lerner & Antoinette Schoar & Jialan Wang, 2008. "Secrets of the Academy: The Drivers of University Endowment Success," Journal of Economic Perspectives, American Economic Association, vol. 22(3), pages 207-22, Summer.
  9. Josh Lerner & Antoinette Schoar & Wan Wongsunwai, 2007. "Smart Institutions, Foolish Choices: The Limited Partner Performance Puzzle," Journal of Finance, American Finance Association, vol. 62(2), pages 731-764, 04.
  10. Yael V. Hochberg & Alexander Ljungqvist & Annette Vissing-Jørgensen, 2014. "Informational Holdup and Performance Persistence in Venture Capital," Review of Financial Studies, Society for Financial Studies, vol. 27(1), pages 102-152, January.
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Cited by:
  1. Da Rin, M. & Phalippou, L., 2014. "There is Something Special About Large Investors: Evidence From a Survey of Private Equity Limited Partners," Discussion Paper 2014-010, Tilburg University, Tilburg Law and Economic Center.

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