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Smart Institutions, Foolish Choices: The Limited Partner Performance Puzzle

  • JOSH LERNER
  • ANTOINETTE SCHOAR
  • WAN WONGSUNWAI

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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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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  1. James M. Poterba, 1989. "Venture Capital and Capital Gains Taxation," NBER Chapters, in: Tax Policy and the Economy, Volume 3, pages 47-68 National Bureau of Economic Research, Inc.
  2. 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.
  3. Steven Kaplan & Antoinette Schoar, 2003. "Private Equity Performance: Returns, Persistence and Capital," NBER Working Papers 9807, National Bureau of Economic Research, Inc.
  4. Thomas Hellman & Laura Lindsey & Manju Puri, 2004. "Building Relationships Early: Banks in Venture Capital," NBER Working Papers 10535, National Bureau of Economic Research, Inc.
  5. 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.
  6. Gromb, Denis & Vayanos, Dimitri, 2001. "Equilibrium and Welfare in Markets with Financially Constrained Arbitrageurs," CEPR Discussion Papers 3049, C.E.P.R. Discussion Papers.
  7. Paul A. Gompers & Josh Lerner, 1999. "What Drives Venture Capital Fundraising?," NBER Working Papers 6906, National Bureau of Economic Research, Inc.
  8. Barberis, Nicholas & Shleifer, Andrei, 2003. "Style investing," Journal of Financial Economics, Elsevier, vol. 68(2), pages 161-199, May.
  9. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
  10. 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.
  11. Paul A. Gompers & Andrew Metrick, 1998. "Institutional Investors and Equity Prices," NBER Working Papers 6723, National Bureau of Economic Research, Inc.
  12. 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 3340, C.E.P.R. Discussion Papers.
  13. 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.
  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, vol. 39(2), pages 463-98, October.
  15. 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.
  16. Kenneth A. Froot & Melvyn Teo, 2004. "Equity Style Returns and Institutional Investor Flows," NBER Working Papers 10355, National Bureau of Economic Research, Inc.
  17. 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.
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