Raising Funds on Performance: Are Private Equity Returns Too Good to Be True?

Abstract

Recent studies on agency problems in private equity have fueled the suspicion that general partners (GPs) strategically manipulate performance estimates around fundraising times. While these studies rely on aggregated portfolio data, this paper offers the first empirical analysis of "window dressing" in private equity based on quarterly reported deal-level performance. Using information on buyout funds, I do not find any red flags of inflated performance on the deal-level. Observed interim peaks in valuation on the fund level result from timing of fundraising decisions to true estimates of high current asset values, while GPs cannot systematically repeat good outcomes.

Keywords: Private Equity, Performance Manipulation, Financial Intermediation, Fundraising

JEL Classification: G10, G20, G23, G24