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Measuring Institutional Investors’ Skill at Making Private Equity Investments

Fisher College of Business Working Paper No. 2016-03-14

Charles A. Dice Center Working Paper No. 2016-14

80 Pages Posted: 21 Aug 2016 Last revised: 5 Oct 2017

Daniel R. Cavagnaro

California State University, Fullerton

Berk A. Sensoy

Vanderbilt University - Finance

Yingdi Wang

California State University, Fullerton

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 4, 2017

Abstract

Using a large sample of institutional investors’ investments in private equity funds raised between 1991 and 2011, we estimate the extent to which investors’ skill affects their returns. Bootstrap analyses show that the variance of actual performance is higher than would be expected by chance, suggesting that some investors consistently outperform. Extending the Bayesian approach of Korteweg and Sorensen (2017), we estimate that a one standard deviation increase in skill leads to an increase in annual returns of between one and two percentage points. These results are stronger in the earlier part of the sample period and for venture funds.

Keywords: Institutional Investors, Private Equity, Investment Skill, Markov Chain Monte Carlo

JEL Classification: G11, G23, G24

Suggested Citation

Cavagnaro, Daniel R. and Sensoy, Berk A. and Wang, Yingdi and Weisbach, Michael S., Measuring Institutional Investors’ Skill at Making Private Equity Investments (October 4, 2017). Fisher College of Business Working Paper No. 2016-03-14; Charles A. Dice Center Working Paper No. 2016-14. Available at SSRN: https://ssrn.com/abstract=2826633 or http://dx.doi.org/10.2139/ssrn.2826633

Daniel Cavagnaro

California State University, Fullerton ( email )

800 N State College St
Fullerton, CA 92831
United States

Berk Sensoy

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Yingdi Wang

California State University, Fullerton ( email )

800 N State College St
Fullerton, CA 92831
United States

Michael Weisbach (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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