What Drives Private Equity Returns? - Fund Inflows, Skilled Gps, And/Or Risk?
CEFS Working Paper No. 2004-2
35 Pages Posted: 15 Sep 2004 Last revised: 13 Feb 2009
There are 3 versions of this paper
What Drives Private Equity Returns? - Fund Inflows, Skilled GPs, and/or Risk?
What Drives Private Equity Returns? - Fund Inflows, Skilled Gps, And/Or Risk?
What Drives Private Equity Returns? - Fund Inflows, Skilled GPs, and/or Risk?
Date Written: September 2007
Abstract
This paper analyzes the determinants of returns generated by European private equity funds. It starts from the presumption that this asset class is characterized by illiquidity, stickiness and segmentation. As a consequence, Gompers and Lerner (2000) have shown that venture deal valuations are driven by overall fund inflows into the industry giving way to the so called 'money chasing deals' phenomenon. It is the aim of this paper to document that this phenomenon also explains a significant part of variation in private equity funds' returns. This is especially true for venture funds, as they are more affected by illiquidity and segmentation than buy-out funds. Actually, the paper presents a WLS-regression model that is able to explain up to 47% of variation in funds' returns. Apart from the importance of fund flows we can also show that market sentiment, the GPs' skills as well as the idiosyncratic risk of a fund have a significant impact on its returns. Moreover, they seem to be unrelated to stock market returns and negatively correlated with the development of the economy as a whole. According to a bootstrapping inference the results seem to be quite stable.
Keywords: Private equity funds, venture capital, financing, WLS, bootstrapping
JEL Classification: G24
Suggested Citation: Suggested Citation
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