The Performance of Private Equity

Abstract

We present conclusive evidence on the performance of private equity, using a high quality dataset of fund cash flows that covers about 85 percent of capital ever raised by U.S. buyout funds. For almost all vintage years since 1980, U.S. buyout funds have significantly outperformed the S&P 500. Liquidated funds from 1980 to 2000 have delivered excess returns of about 450 basis points per year. Adding partially liquidated funds up to 2005, excess returns rise to over 800 basis points. The cross-sectional variation is considerable with just over 60% of all funds doing better than the S&P, and excess returns being driven by top-decile rather than top-quartile funds. We document an extreme cyclicality in returns with much higher figures for funds set up in the first half of each of the past three decades, and correspondingly lower returns towards the end of each decade. However, we find a significant downward trend in absolute returns over all 29 vintage years. Our results are robust to measuring excess returns via money multiples instead of IRRs, and are essentially unchanged when pricing residual values at observed secondary market discounts.

Keywords: Private Equity, Leveraged Buyouts, Performance Measurement

JEL Classification: G11, G15, G24, G34