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Skill and Luck in Private Equity Performance

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  • Korteweg, Arthur G.

    (Stanford University)

  • Sorensen, Morten

    (Columbia University and Swedish Institute for Financial Research)

Abstract

We evaluate the performance of private equity ("PE") funds, using a variance decomposition model to separate skill from luck. We find a large amount of long-term persistence, and skilled PE firms outperform by 7% to 8% annually. But this performance is noisy, with a large amount of luck, so top-quartile performance does not necessarily imply top-quartile skills, making it difficult for investors ("LPs") to identify skilled PE firms. Buyout ("BO") firms show the largest skill differences, implying the greatest long-term persistence. Venture capital ("VC") performance is the most noisy, making good VC firms hardest to identify, and implying the smallest amount of investable persistence.

Suggested Citation

  • Korteweg, Arthur G. & Sorensen, Morten, 2014. "Skill and Luck in Private Equity Performance," Research Papers 3096, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3096
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    File URL: http://www.gsb.stanford.edu/faculty-research/working-papers/skill-luck-private-equity-performance
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    Cited by:

    1. Nicolae Gârleanu & Lasse Heje Pedersen, 2018. "Efficiently Inefficient Markets for Assets and Asset Management," Journal of Finance, American Finance Association, vol. 73(4), pages 1663-1712, August.
    2. Buchner, Axel & Mohamed, Abdulkadir & Schwienbacher, Armin, 2020. "Herd behaviour in buyout investments," Journal of Corporate Finance, Elsevier, vol. 60(C).
    3. Buchner, Axel & Mohamed, Abdulkadir & Schwienbacher, Armin, 2016. "Does risk explain persistence in private equity performance?," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 18-35.
    4. Braun, Reiner & Jenkinson, Tim & Stoff, Ingo, 2017. "How persistent is private equity performance? Evidence from deal-level data," Journal of Financial Economics, Elsevier, vol. 123(2), pages 273-291.

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