Catering and Return Manipulation in Private Equity

Abstract

We provide evidence that private equity (PE) fund managers manipulate returns to cater to their investors. Using a large dataset of PE real estate funds, we show PE fund managers boost and smooth their funds' returns if doing so has a larger effect on their investors' reported returns. Additional results are inconsistent with models in which investors punish or are deceived by manipulations. In contrast, instrumental variable estimates based on trustee tenures and the timing of gubernatorial elections highlight that PE managers' return boosting increases when the career concerns of their public pension investors' trustees are the strongest.

Keywords: Private Equity, Performance Manipulation

JEL Classification: G11, G24, G30