Catering and Return Manipulation in Private Equity
85 Pages Posted: 18 Oct 2022 Last revised: 16 Dec 2022
Date Written: October 11, 2022
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 overstate returns if they oversee a larger share of their investors' assets, and doing so has a more significant impact on investors' reported returns. Additional results are inconsistent with models in which investors punish or are deceived by manipulations. In contrast, our results highlight an underlying tension in PE performance: the "phony happiness” some PE investors receive from overstated and smoothed interim returns due to agency frictions within their organizations.
Keywords: Private Equity, Performance Manipulation
JEL Classification: G11, G24, G30
Suggested Citation: Suggested Citation