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Private Equity Performance: Returns, Persistence and Capital Flows

46 Pages Posted: 4 Dec 2003  

Steven N. Kaplan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: November 2003

Abstract

This paper investigates the performance of private equity partnerships using a data set of individual fund returns collected by Venture Economics. Over the sample period, average fund returns net of fees approximately equal the S&P 500 although there is a large degree of heterogeneity among fund returns. Returns persist strongly across funds raised by individual private equity partnerships. The returns also improve with partnership experience. Better performing funds are more likely to raise follow-on funds and raise larger funds than funds that perform poorly. This relationship is concave so that top performing funds do not grow proportionally as much as the average fund in the market. At the industry level, we show that market entry in the private equity industry is cyclical. Funds (and partnerships) started in boom times are less likely to raise follow-on funds, suggesting that these funds subsequently perform worse. Aggregate industry returns are lower following a boom, but most of this effect is driven by the poor performance of new entrants, while the returns of established funds are much less affected by these industry cycles. Several of these results differ markedly from those for mutual funds.

Keywords: private equity partnerships, fund returns,

Suggested Citation

Kaplan, Steven N. and Schoar, Antoinette, Private Equity Performance: Returns, Persistence and Capital Flows (November 2003). MIT Sloan Working Paper No. 4446-03; AFA 2004 San Diego Meetings. Available at SSRN: https://ssrn.com/abstract=473341 or http://dx.doi.org/10.2139/ssrn.473341

Steven Neil Kaplan

University of Chicago - Booth School of Business ( email )

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Antoinette Schoar (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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