Skill and Luck in Private Equity Performance
69 Pages Posted: 3 Apr 2014 Last revised: 16 Dec 2015
Date Written: October 29, 2015
A striking feature of private equity (PE) is that performance is persistent, with many PE firms consistently producing high (or low) returns net of fees. We use a new variance decomposition model to isolate three components of performance persistence. We find a large amount of long-term persistence: the spread in expected net-of-fees future returns between top- and bottom-quartile PE firms is 7 to 8 percentage points annually. This spread is after controlling for substantial spurious persistence, which arises mechanically from the overlap of contemporaneous funds. Performance is noisy, however, and we find little investable persistence, meaning that it is difficult for investors in PE funds to identify top-quartile funds with top-quartile expected future performance.
Keywords: Persistence, private equity, venture capital, skill, learning
JEL Classification: G11, G12, G24, C11
Suggested Citation: Suggested Citation