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Giants at the Gate: Investment Returns and Diseconomies of Scale in Private Equity

56 Pages Posted: 23 Mar 2009 Last revised: 17 Jan 2014

Florencio Lopez de Silanes

SKEMA Business School; National Bureau of Economic Research (NBER)

Ludovic Phalippou

University of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance

Oliver Gottschalg

HEC Paris - Strategy & Business Policy

Date Written: August 2, 2013

Abstract

We document the wide dispersion of private equity investment returns and examine performance determinants using a newly constructed database of 7,500 investments worldwide. One in ten investments does not return any money, whereas one in four has an IRR above 50%. Quick flips are associated with some of the highest returns. Performance does not appear scalable: Investments held by private equity firms in periods with a high number of simultaneous investments underperform substantially. Results are consistent with the theoretical literature on organizational diseconomies linked to firm structure. Private equity firms’ actions do not appear to be mechanical or easily scalable.

Keywords: private equity, diseconomies of scale

JEL Classification: G24

Suggested Citation

Lopez de Silanes, Florencio and Phalippou, Ludovic and Gottschalg, Oliver, Giants at the Gate: Investment Returns and Diseconomies of Scale in Private Equity (August 2, 2013). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming; AFA 2010 Atlanta Meetings Paper; EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1363883 or http://dx.doi.org/10.2139/ssrn.1363883

Florencio Lopez de Silanes

SKEMA Business School ( email )

Avenue Willy Brandt, Euralille
Lille, 59777
France

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ludovic Phalippou (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Oliver Gottschalg

HEC Paris - Strategy & Business Policy ( email )

Jouy-en-Josas Cedex, 78351
France

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