Size, Returns, and Value Added: Do Private Equity Firms Allocate Capital According To Manager Skill?

57 Pages Posted: 29 Oct 2019 Last revised: 24 Jan 2023

See all articles by Reiner Braun

Reiner Braun

Technische Universität München (TUM) - TUM School of Management; Center for Entrepreneurial and Financial Studies

Nils Dorau

Technische Universität München (TUM)

Tim Jenkinson

University of Oxford - Said Business School; European Corporate Governance Institute (ECGI)

Daniel Urban

Erasmus University Rotterdam (EUR) - Department of Business Economics; Erasmus Research Institute of Management (ERIM)

Date Written: January 23, 2023

Abstract

Private equity (PE) organizations have strong incentives to increase fund and deal sizes. We show, on average, that larger deals produce lower returns, with lower risk, but produce higher gross value added in dollar terms. Employing a unique manager-deal matched data set we find performance persistence at the individual manager-level and that more capital is allocated to skilled managers in the investment team. Since investors cannot reallocate capital easily and encounter information frictions in private markets, PE organizations have an important role to play in managing the interplay of skill and scalability to maintain relative returns and value added.

Keywords: Private equity, performance persistence, value added, skill, scale

JEL Classification: G23, G24

Suggested Citation

Braun, Reiner and Dorau, Nils and Jenkinson, Tim and Urban, Daniel, Size, Returns, and Value Added: Do Private Equity Firms Allocate Capital According To Manager Skill? (January 23, 2023). Available at SSRN: https://ssrn.com/abstract=3475460 or http://dx.doi.org/10.2139/ssrn.3475460

Reiner Braun (Contact Author)

Technische Universität München (TUM) - TUM School of Management ( email )

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Munich, Deutschland 80333
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+498928925188 (Fax)

HOME PAGE: http://www.ef.wi.tum.de/

Center for Entrepreneurial and Financial Studies ( email )

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Nils Dorau

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

Tim Jenkinson

University of Oxford - Said Business School ( email )

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Oxford, OX1 1HP
United Kingdom
+44 1865 288916 (Phone)
+44 1865 288831 (Fax)

HOME PAGE: http://www.sbs.oxford.edu/timjenkinson

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Daniel Urban

Erasmus University Rotterdam (EUR) - Department of Business Economics ( email )

Netherlands

HOME PAGE: http://sites.google.com/view/danielurban/home

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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