Private Equity Fund Size, Investment Size, and Value Creation
Review of Finance, Vol. 16, No. 3, 2012
67 Pages Posted: 13 Jun 2010 Last revised: 5 Aug 2012
Date Written: 2012
This paper examines why large PE funds earn lower returns. I argue that large PE-funds are suited to making large investments and small PE-funds are suited to nurturing start-ups. Thus, the sub-optimal investment in small companies is one driver of the size effect in private equity. A theoretical model and empirical results from a sample of 1222 funds in the United States support this prediction. The largest 25% of PE funds earn IRRs of 5.17% when they invest in the largest 25% of companies but only -2.98% when they invest in the smallest 25%. This suggests that investment size is a driver of the size effect in private equity.
Keywords: Private Equity, Size Effect, Venture Capital
JEL Classification: G11, G24, M13
Suggested Citation: Suggested Citation