Skill and Luck in Private Equity Performance
59 Pages Posted: 8 Jul 2014
Date Written: April 30, 2014
We evaluate the performance of private equity (“PE”) funds, using a variance decomposition model to separate skill from luck. We find a large amount of long-term persistence, and skilled PE firms outperform by 7% to 8% annually. But this performance is noisy, with a large amount of luck, so top-quartile performance does not necessarily imply top-quartile skills, making it difficult for investors (“LPs”) to identify skilled PE firms. Buyout (“BO”) firms show the largest skill differences, implying the greatest long-term persistence. Venture capital (“VC” ) performance is the most noisy, making good VC firms hardest to identify, and implying the smallest amount of investable persistence.
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