Skill and Luck in Private Equity Performance
Arthur G. Korteweg
University of Southern California - Marshall School of Business
Copenhagen Business School; Columbia Business School; National Bureau of Economic Research (NBER); Swedish Institute for Financial Research (SIFR)
Rock Center for Corporate Governance at Stanford University Working Paper No. 179
We evaluate the performance of private equity (“PE”) funds, using a variance decomposition model to separate skill from luck. We find a large amount of long-term persistence, and skilled PE firms outperform by 7% to 8% annually. But this performance is noisy, with a large amount of luck, so top-quartile performance does not necessarily imply top-quartile skills, making it difficult for investors (“LPs”) to identify skilled PE firms. Buyout (“BO”) firms show the largest skill differences, implying the greatest long-term persistence. Venture capital (“VC”) performance is the most noisy, making good VC firms hardest to identify, and implying the smallest amount of investable persistence.
Number of Pages in PDF File: 59
Keywords: Persistence, skill, private equity, venture capital, learning
JEL Classification: G11, G12, G24, C11working papers series
Date posted: April 3, 2014 ; Last revised: April 17, 2014
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