Investor Scale and Performance in Private Equity Investments

Abstract:     
We examine private equity (PE) investments of defined benefit pension plans and find that PE returns are 7.4% per year greater if the plan has significant rather than small holdings in PE. Cost savings for larger PE investors account for one quarter of the superior performance. These savings arise in equal parts from superior negotiating power and from more extensive use of lower cost investment approaches, most notably direct investing. Three quarters of the performance gains come from superior gross returns for larger PE investors. Tests suggest this reflects a superior ability of larger plans to bridge the significant information asymmetries between investors and general partners. These benefits to investor scale have limits, with concavity in the scale-performance relationship implying eventual diseconomies at very high levels of PE investment. Consistent with these return patterns, we find substantially more investments in PE by plans with the ability to scale up their PE investments.

Number of Pages in PDF File: 49

working papers series