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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)

  • L. Phalippou

Using a unique and comprehensive dataset, we show that the sample of mature private equityfunds used in previous research and as an industry benchmark is biased towards betterperforming funds. We also show that accounting values reported by these mature funds for nonexitedinvestments are substantial and we provide evidence that they mostly represent living deadinvestments. After correcting for sample bias and overstated accounting values, average fundperformance changes from slight overperformance to substantial underperformance of -3.83% peryear with respect to the S&P 500. Assuming a typical fee structure, we find that gross-of-feesthese funds outperform by 2.96% per year. We conclude that the stunning growth in the amountallocated to this asset class cannot be attributed to genuinely high past performance. We discussseveral potentially misleading aspects of standard performance reporting and discuss some of theadded benefits of investing in private equity funds as a first step towards an explanation for ourresults.

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Paper provided by HAL in its series Post-Print with number halshs-00125912.

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Date of creation: 2006
Publication status: Published in Cahier de recherche - Working Paper of the INSEAD-Wharton Alliance. 2006
Handle: RePEc:hal:journl:halshs-00125912
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00125912
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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  1. Alexander Ljungqvist & Matthew Richardson, 2003. "The cash flow, return and risk characteristics of private equity," NBER Working Papers 9454, National Bureau of Economic Research, Inc.
  2. Steven Kaplan & Antoinette Schoar, 2003. "Private Equity Performance: Returns, Persistence and Capital," NBER Working Papers 9807, National Bureau of Economic Research, Inc.
  3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  4. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-592, June.
  5. 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.
  6. 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.
  7. Thomas Hellmann & Laura Lindsey & Manju Puri, 2008. "Building Relationships Early: Banks in Venture Capital," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 513-541, April.
  8. 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.
  9. 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.
  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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