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); Centre for Economic Policy Research (CEPR); Swedish Institute for Financial Research (SIFR)
October 29, 2014
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 that separates long-term, investable, and spurious persistence. We find a large amount of long-term persistence: the spread in the expected returns of top- and bottom-quartile PE firms is 7 to 8 percentage points annually. Performance is noisy, however, and top-quartile past performance does not imply top-quartile expected future returns, especially for VC firms. Based on past performance alone, an investor needs to observe an excessive number of funds to identify the PE firms with top-quartile expected returns, implying low investable persistence.
Number of Pages in PDF File: 60
Keywords: Persistence, private equity, venture capital, skill, learning
JEL Classification: G11, G12, G24, C11
Date posted: April 3, 2014 ; Last revised: October 30, 2014
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