The Cost of Private Equity

39 Pages Posted: 16 Nov 2013

See all articles by Ingo Stoff

Ingo Stoff

Technische Universität München (TUM) - Center for Entrepreneurial and Financial Studies

Reiner Braun

Technische Universität München (TUM) - TUM School of Management; Center for Entrepreneurial and Financial Studies

Date Written: November 15, 2013

Abstract

Private equity (PE) has developed into a well-established asset class with strong growth in capital commitments over the last decades. Consequently, fund returns have decreased over time and investors have become more cost conscious. Based on a unique data set of 358 PE buyout funds with vintage years between 1983 and 2007, we analyze whether the maturing PE asset class has become less costly over time. We define costs as the difference between gross and net returns (return spread) and provide a spread benchmark useful for investors to evaluate a fund’s costliness. Next, we show that, in line with our expectations, return spreads have decreased over time. However, when we control for falling gross returns causing lower performance-based fees, surprisingly, the cost of PE investing has increased. We relate the higher costs to increased levels of dry powder due to swelling capital flows into the industry. We conclude that the PE industry is a victim of its own success, suggesting that investors in the asset class should consider a more anti-cyclical investment approach.

Keywords: Private equity, fund return, dry powder, investment behavior

JEL Classification: G11, G23, G24

Suggested Citation

Stoff, Ingo and Braun, Reiner, The Cost of Private Equity (November 15, 2013). Available at SSRN: https://ssrn.com/abstract=2354985 or http://dx.doi.org/10.2139/ssrn.2354985

Ingo Stoff (Contact Author)

Technische Universität München (TUM) - Center for Entrepreneurial and Financial Studies ( email )

Arcisstraße 21
München, 80333
Germany

Reiner Braun

Technische Universität München (TUM) - TUM School of Management ( email )

Arcisstr. 21
Munich, Deutschland 80333
Germany
+498928925181 (Phone)
+498928925188 (Fax)

HOME PAGE: http://www.ef.wi.tum.de/

Center for Entrepreneurial and Financial Studies ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

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