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Giants at the Gate: On the Cross-Section of Private Equity Investment Returns

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  • Florencio Lopez-de-Silanes

    (University of Amsterdam, EDHEC Business School, NBER)

  • Ludovic Phalippou

    (University of Amsterdam)

  • Oliver Gottschalg

    (HEC Paris)

Abstract

We examine the determinants of private equity returns using a newly constructed database of 7,500investments worldwide over forty years. The median investment IRR (PME) is 21% (1.3), gross offees. One in ten investments goes bankrupt, whereas one in four has an IRR above 50%. Only one ineight investments is held for less than 2 years, but such investments have the highest returns. Thescale of private equity firms is a significant driver of returns: investments held at times of a highnumber of simultaneous investments underperform substantially. The median IRR is 36% in thelowest scale decile and 16% in the highest. Results survive robustness tests. Diseconomies of scaleare linked to firm structure: independent firms, less hierarchical firms, and those with managers ofsimilar professional backgrounds exhibit smaller diseconomies of scale.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-035/2/DSF12.

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Date of creation: 11 Feb 2011
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Handle: RePEc:dgr:uvatin:20110035

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Web page: http://www.tinbergen.nl

Related research

Keywords: private equity; diseconomies of scale;

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Cited by:
  1. Brahm, Francisco & Tarziján, Jorge, 2012. "The impact of complexity and managerial diseconomies on hierarchical governance," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 586-599.
  2. Agarwal, Vikas & Nada, Vikram & Ray, Sugata, 2013. "Institutional investment and intermediation in the hedge fund industry," CFR Working Papers 13-03, University of Cologne, Centre for Financial Research (CFR).
  3. Achleitner, Ann-Kristin & Braun, Reiner & Engel, Nico, 2011. "Value creation and pricing in buyouts: Empirical evidence from Europe and North America," Review of Financial Economics, Elsevier, vol. 20(4), pages 146-161.
  4. Cumming, Douglas & Dai, Na, 2011. "Fund size, limited attention and valuation of venture capital backed firms," Journal of Empirical Finance, Elsevier, vol. 18(1), pages 2-15, January.
  5. 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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