Skill and Luck in Private Equity Performance

59 Pages Posted: 8 Jul 2014

See all articles by Arthur G. Korteweg

Arthur G. Korteweg

University of Southern California - Marshall School of Business

Morten Sorensen

Copenhagen Business School; Columbia Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: April 30, 2014

Abstract

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.

Suggested Citation

Korteweg, Arthur G. and Sørensen, Morten, Skill and Luck in Private Equity Performance (April 30, 2014). Netspar Discussion Paper No. 04/2014-026. Available at SSRN: https://ssrn.com/abstract=2463183 or http://dx.doi.org/10.2139/ssrn.2463183

Arthur G. Korteweg

University of Southern California - Marshall School of Business ( email )

3670 Trousdale Parkway
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~korteweg/

Morten Sørensen (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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