Decreasing Returns or Reversion to the Mean? The Case of Private Equity Fund Growth

53 Pages Posted: 31 Dec 2019

See all articles by Andrea Rossi

Andrea Rossi

University of Arizona - Department of Finance

Date Written: December 30, 2019

Abstract

When a private equity firm raises a larger fund, performance tends to decline. This pattern is usually interpreted as evidence of decreasing returns. I propose a more innocuous explanation: high-growth private equity firms were on average lucky in the past and therefore are expected to experience reversion to the mean. Controlling for this expectation, the effect of fund growth on performance is 80% to 90% smaller and statistically insignificant. The silver lining is that, historically, fund managers have been able to keep decreasing returns at bay. Additional analysis highlights important differences between buyout funds and venture capital funds.

Keywords: Private Equity, Buyout, Venture Capital, Returns to Scale, Fund Size, Skill, Luck

JEL Classification: G11, G23, G24

Suggested Citation

Rossi, Andrea, Decreasing Returns or Reversion to the Mean? The Case of Private Equity Fund Growth (December 30, 2019). Available at SSRN: https://ssrn.com/abstract=3511348 or http://dx.doi.org/10.2139/ssrn.3511348

Andrea Rossi (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

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