Persistently Poor Performance in Private Equity Real Estate

Abstract

We compare Buyout (BO), Venture Capital (VC), and Private Equity Real Estate (RE) funds. RE funds underperform BO and VC, as well as the public market alternative. In RE, worse-performing fund managers survive at a high rate. They are also susceptible to diseconomies of fund scale, with no skill-based persistence to offset the negative scale effects. Analysis of noisy fund manager selection indicates that RE investors are not disadvantaged relative to BO and VC. LP investors in RE funds seem to be optimizing something other than, or in addition to, investment return when selecting fund managers.

Keywords: Alternative investments, Pension fund investment, Private equity, Buyout, Venture capital, Real estate, Performance, Skill, Persistence, Exit, Survival, Tournament

JEL Classification: C11, D02, D40, G20, G23, G24, L10, R51