Cyclicality, Performance Measurement, and Cash Flow Liquidity in Private Equity
David T. Robinson
Fuqua School of Business, Duke University; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative
Berk A. Sensoy
Ohio State University - Fisher College of Business
September 20, 2013
Charles A. Dice Center Working Paper No. 2010-021
Fisher College of Business Working Paper No. 2010-03-021
This paper takes a new approach towards understanding the risk/return tradeo↵ that investors to private equity face when they invest in private equity partnerships. We study the sensitivity of private equity cash flows to business cycle and market conditions using a new large dataset of cash flows to 837 buyout and venture capital funds from 1984-2010. Buyout has outperformed the S&P 500 by 18% on average over the life of the fund, while venture capital has underperformed since at least the late 1990s. Most cash flow variation at a point in time is diversifiable - either idiosyncratic to a given fund or explained by the fund’s age. Both capital calls and distributions also
have a systematic component that is procyclical on average. Distributions are more sensitive than calls, implying procyclical aggregate net cash flows. A consequence is that the well-known finding that funds raised in hot markets underperform in absolute terms is sharply attenuated when comparing to public equities. Consistent with a liquidity premium for calling capital in bad times, we find that funds with a relatively high propensity to do so perform better in both absolute and relative terms. Venture capital cash flows and performance are considerably more cyclical than buyout, and the links between cyclical cash flows and performance are likewise stronger.
Number of Pages in PDF File: 49
Keywords: Private Equity, Cash Flows, Performance, Fees, Carried Interest, Capital Commitments, Crisis
JEL Classification: G01, G23, G24
Date posted: December 28, 2010 ; Last revised: September 24, 2013
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