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Smart Institutions, Foolish Choices? The Limited Partner Performance Puzzle

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  • Josh Lerner
  • Antoinette Schoar
  • Wan Wong

Abstract

The returns that institutional investors realize from private equity investments differ dramatically across institutions. Using detailed and hitherto unexplored records of fund investors and performance, we document large heterogeneity in the performance of different classes of limited partners. In particular, endowments' annual returns are nearly 14% greater than average. Funds selected by investment advisors and banks lag sharply. These results are robust to controlling for the type and year of the investment, as well as to the use of different specifications. Analyses of reinvestment decisions and young funds suggest that the results are not primarily due to endowments' greater access to established funds. Finally, we examine the differences in the choice of intermediaries across various institutional investors and their relationship to success. We find that LPs that have higher average IRRs also tend to invest in older funds and have a smaller fraction of GPs in their geographic area, and that the performance of university endowments is correlated with measures of the quality and loyalty of the student body.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11136.

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Date of creation: Feb 2005
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Publication status: published as Lerner, Josh, Antoinette Schoar and Wan Wong. "Smart Institutions, Foolish Choices?: The Limited Partner Performance Puzzle." Journal of Finance 62 (2007): 731-764.
Handle: RePEc:nbr:nberwo:11136

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  1. Mayer, Colin & Schoors, Koen & Yafeh, Yishay, 2002. "Sources of Funds and Investment Activities of Venture Capital Funds: Evidence from Germany, Israel, Japan and the UK," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3340, C.E.P.R. Discussion Papers.
  2. Lerner, Joshua & Schoar, Antoinette, 2003. "The Illiquidity Puzzle: Theory and Evidence from Private Equity," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 4378-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Nicholas Barberis & Andrei Shleifer, 2000. "Style Investing," NBER Working Papers 8039, National Bureau of Economic Research, Inc.
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  6. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 35-55, March.
  7. James M. Poterba, 1989. "Venture Capital and Capital Gains Taxation," NBER Working Papers 2832, National Bureau of Economic Research, Inc.
  8. Lakonishok, Joseph & Shleifer, Andrei & Vishny, Robert W., 1992. "The Structure and Performance of the Money Management Industry," Scholarly Articles 10498059, Harvard University Department of Economics.
  9. 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, American Economic Association, vol. 85(5), pages 1088-1105, December.
  10. Kenneth A. Froot & Melvyn Teo, 2004. "Equity Style Returns and Institutional Investor Flows," NBER Working Papers 10355, National Bureau of Economic Research, Inc.
  11. Thomas Hellmann & Laura Lindsey & Manju Puri, 2008. "Building Relationships Early: Banks in Venture Capital," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(2), pages 513-541, April.
  12. Gompers, Paul & Lerner, Josh, 1999. "An analysis of compensation in the U.S. venture capital partnership," Journal of Financial Economics, Elsevier, Elsevier, vol. 51(1), pages 3-44, January.
  13. Steven N. Kaplan & Antoinette Schoar, 2005. "Private Equity Performance: Returns, Persistence, and Capital Flows," Journal of Finance, American Finance Association, American Finance Association, vol. 60(4), pages 1791-1823, 08.
  14. Gompers, Paul & Lerner, Josh, 1996. "The Use of Covenants: An Empirical Analysis of Venture Partnership Agreements," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 39(2), pages 463-98, October.
  15. Gompers, Paul & Lerner, Josh, 2000. "Money chasing deals? The impact of fund inflows on private equity valuation," Journal of Financial Economics, Elsevier, Elsevier, vol. 55(2), pages 281-325, February.
  16. Steven Kaplan & Antoinette Schoar, 2003. "Private Equity Performance: Returns, Persistence and Capital," NBER Working Papers 9807, National Bureau of Economic Research, Inc.
  17. Paul A. Gompers & Josh Lerner, 1999. "What Drives Venture Capital Fundraising?," NBER Working Papers 6906, National Bureau of Economic Research, Inc.
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