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

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  • Lopez-de-Silanes, Florencio
  • Phalippou, Ludovic
  • Gottschalg, Olivier

Abstract

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

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28487.

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Date of creation: 23 Nov 2010
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Handle: RePEc:pra:mprapa:28487

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Keywords: Private Equity; investment; LBOs; Buyouts;

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Cited by:
  1. 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).
  2. Da Rin, M. & Phalippou, L., 2014. "There is Something Special About Large Investors: Evidence From a Survey of Private Equity Limited Partners," Discussion Paper, Tilburg University, Center for Economic Research 2014-016, Tilburg University, Center for Economic Research.
  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, Elsevier, vol. 20(4), pages 146-161.
  4. Brahm, Francisco & Tarziján, Jorge, 2012. "The impact of complexity and managerial diseconomies on hierarchical governance," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 84(2), pages 586-599.
  5. Cumming, Douglas & Dai, Na, 2011. "Fund size, limited attention and valuation of venture capital backed firms," Journal of Empirical Finance, Elsevier, Elsevier, vol. 18(1), pages 2-15, January.

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