Skill and Luck in Private Equity Performance
Arthur G. Korteweg
University of Southern California - Marshall School of Business
Copenhagen Business School; Columbia Business School; Centre for Economic Policy Research (CEPR)
October 29, 2015
Rock Center for Corporate Governance at Stanford University Working Paper No. 179
A striking feature of private equity (PE) is that performance is persistent, with many PE firms consistently producing high (or low) returns net of fees. We use a new variance decomposition model to isolate three components of performance persistence. We find a large amount of long-term persistence: the spread in expected net-of-fees future returns between top- and bottom-quartile PE firms is 7 to 8 percentage points annually. This spread is after controlling for substantial spurious persistence, which arises mechanically from the overlap of contemporaneous funds. Performance is noisy, however, and we find little investable persistence, meaning that it is difficult for investors in PE funds to identify top-quartile funds with top-quartile expected future performance.
Number of Pages in PDF File: 69
Keywords: Persistence, private equity, venture capital, skill, learning
JEL Classification: G11, G12, G24, C11
Date posted: April 3, 2014 ; Last revised: December 16, 2015
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