Interim Fund Performand and Fundraising in Private Equity

We study the interim performance of private equity (PE) funds around the time of fundraising events using fund level cash flow and valuation data for over 800 funds raised between 1993 and 2009. We first show that interim performance, measured as the current fund's percentile rank relative to its vintage year cohort funds, materially affects the PE firm's ability to raise a follow-on fund and the size of the follow-on fund. Given these incentive results, we hypothesize and find that PE firms time their fundraising activities to coincide with periods when the current fund's interim performance is at its peak relative to its vintage year cohorts. We further document that the size and frequency of net asset value (NAV) markdowns increases in the period following fundraising, which suggests that fund valuations are inflated during the fundraising period. Consistent with this interpretation, we find the size and frequency of markdowns increases most for small, young, and low-reputation PE firms, which have the clearest incentives to report strong interim performance. For buyout funds, we also find evidence of post-fundraising performance erosion (due to NAV inflation during fundraising) but only among the small, young, and low-reputation PE firms. Our results indicate that PE firms, particularly small, young, and low-reputation firms, are good at timing their fundraising activities to coincide with periods of peak performance and are reluctant to mark down the valuations of portfolio companies during fundraising periods.