Do Private Equity Managers Have Superior Information on Public Markets?

Abstract

Using cash flows from a large sample of buyout and venture funds, I show that private equity (PE) distributions predict returns in the industries of funds' specialization. My tests distinguish timing skill from reactions to market conditions and spillover effects of PE activity. Fund managers tend to sell at the industry peaks only when they have performance fees to harvest and foresee public firms' future earnings rather than the variation in discount rates. These results help better understand the performance of PE funds and have implications for manager selection, contract design and the PE role in modern capital markets.

Keywords: Private Equity, Venture Capital, Market Timing, Agency Costs, Portfolio Choice, Institutional Investors, Simulation-based Estimation

JEL Classification: G23, G24, G30