Measuring Institutional Investors’ Skill from Their Investments in Private Equity

60 Pages Posted: 22 Aug 2016

See all articles by Daniel Cavagnaro

Daniel 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); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2016

Abstract

Using a large sample of institutional investors’ private equity investments in venture and buyout funds, we estimate the extent to which investors’ skill affects returns from private equity investments. We first consider whether investors have differential skill by comparing the distribution of investors’ returns relative to the bootstrapped distribution that would occur if funds were randomly distributed across investors. We find that the variance of actual performance is higher than the bootstrapped distribution, suggesting that higher and lower skilled investors consistently outperform and underperform. We then use a Bayesian approach developed by Korteweg and Sorensen (2015) to estimate the incremental effect of skill on performance. The results imply that a one standard deviation increase in skill leads to about a three percentage point increase in returns, suggesting that variation in institutional investors’ skill is an important driver of their returns.

Suggested Citation

Cavagnaro, Daniel and Sensoy, Berk A. and Wang, Yingdi and Weisbach, Michael S., Measuring Institutional Investors’ Skill from Their Investments in Private Equity (August 2016). NBER Working Paper No. w22547. Available at SSRN: https://ssrn.com/abstract=2827472

Daniel Cavagnaro (Contact Author)

California State University, Fullerton ( email )

800 N State College St
Fullerton, CA 92831
United States

Berk A. 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 S. Weisbach

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

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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