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Private Equity Fund Returns: Do Managers Actually Leave Money on the Table?

  • Marquez, Robert

    (Boston University)

  • Nanda, Vikram

    (GA Institute of Technology)

  • Yavuz, M. Deniz

    (Purdue University)

Evidence indicates that private equity funds, unlike mutual funds, deliver persistent abnormal returns and that top performing funds are often oversubscribed. Why do private equity funds appear to leave money on the table, rather than, say, increasing fund size and/or fees? We argue that private equity funds are fundamentally different from mutual funds because their success is contingent on matching with high quality entrepreneurial firms, and these firms are looking to match with high ability managers. In the presence of asymmetric information about managerial actions or fund attributes, we show that fund managers limit fund size and fees and deliver persistent excess returns to investors. They do this in order to manipulate entrepreneurs' beliefs about managerial ability to add value, even though firms are not fooled in equilibrium. The model provides several novel time series and cross sectional predictions about performance persistence, fees and size, in addition to addressing the questions raised above.

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File URL: http://fic.wharton.upenn.edu/fic/papers/10/10-24.pdf
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Paper provided by University of Pennsylvania, Wharton School, Weiss Center in its series Working Papers with number 10-24.

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Date of creation: Aug 2010
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Handle: RePEc:ecl:upafin:10-24
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  1. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  2. Paul Gompers & Anna Kovner & Josh Lerner, 2007. "Specialization and Success: Evidence from Venture Capital," NBER Chapters, in: Entrepreneurship: Strategy and Structure National Bureau of Economic Research, Inc.
  3. Thomas Hellmann & Manju Puri, 2002. "Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence," Journal of Finance, American Finance Association, vol. 57(1), pages 169-197, 02.
  4. Jonathan B. Berk & Richard C. Green, 2004. "Mutual Fund Flows and Performance in Rational Markets," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1269-1295, December.
  5. John H. Cochrane, 2001. "The Risk and Return of Venture Capital," NBER Working Papers 8066, National Bureau of Economic Research, Inc.
  6. Thomas Chemmanur & Karthik Krishnan & Debarshi Nandy, 2008. "How Does Venture Capital Financing Improve Efficiency in Private Firms? A Look Beneath the Surface," Working Papers 08-16, Center for Economic Studies, U.S. Census Bureau.
  7. Baum, Joel A. C. & Silverman, Brian S., 2004. "Picking winners or building them? Alliance, intellectual, and human capital as selection criteria in venture financing and performance of biotechnology startups," Journal of Business Venturing, Elsevier, vol. 19(3), pages 411-436, May.
  8. Chitru S. Fernando & Vladimir A. Gatchev & Paul A. Spindt, 2005. "Wanna Dance? How Firms and Underwriters Choose Each Other," Journal of Finance, American Finance Association, vol. 60(5), pages 2437-2469, October.
  9. 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.
  10. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
  11. Glode, Vincent & Green, Richard C., 2011. "Information spillovers and performance persistence for hedge funds," Journal of Financial Economics, Elsevier, vol. 101(1), pages 1-17, July.
  12. Titman, Sheridan & Trueman, Brett, 1986. "Information quality and the valuation of new issues," Journal of Accounting and Economics, Elsevier, vol. 8(2), pages 159-172, June.
  13. Michael C. Jensen, 1968. "The Performance Of Mutual Funds In The Period 1945–1964," Journal of Finance, American Finance Association, vol. 23(2), pages 389-416, 05.
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