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The Performance of Private Equity Funds

Listed author(s):
  • Oliver Gottschalg

    ()

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Ludovic Phalippou

    (UvA - University of Amsterdam [Amsterdam])

The authors contend that the performance of private equity funds (PEFs) reported by prior studies and industry associations is overstated for two reasons--inflated accounting valuation of ongoing investments and a bias toward better-performing funds. The findings in this article show that PEFs outperform the S&P 500 Index by 3 percent on a gross-of-fees basis. But on a net-of-fees basis, PEFs underperform by 3 percent, and adjusting for risk makes it even worse at 6 percent underperformance per year. The high fee structure is the major contributing factor for PEF underperformance. Despite performance weaknesses, certain investors invest in PEFs for side benefits and motives beyond maximizing returns.

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Paper provided by HAL in its series Post-Print with number hal-00458110.

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Length:
Date of creation: Nov 2009
Publication status: Published in CFA Digest, CFA Institute, 2009, Vol. 39, n° 4, pp. 8-10. <10.2469/dig.v39.n4.7>
Handle: RePEc:hal:journl:hal-00458110
DOI: 10.2469/dig.v39.n4.7
Note: View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-00458110
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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  1. 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.
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  7. Paul Gompers & Josh Lerner, 1998. "Venture Capital Distributions: Short-Run and Long-Run Reactions," Journal of Finance, American Finance Association, vol. 53(6), pages 2161-2183, December.
  8. 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.
  9. Josh Lerner & Antoinette Schoar & Wan Wongsunwai, 2007. "Smart Institutions, Foolish Choices: The Limited Partner Performance Puzzle," Journal of Finance, American Finance Association, vol. 62(2), pages 731-764, 04.
  10. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June.
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