Private Equity Performance: Returns, Persistence and Capital Flows

By Steven N. Kaplan, Antoinette Schoar. 2005

361 citations recorded by the source corpus.

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.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/cb6d83357f42b60785f7a3de7fcb9f986fe35b76

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Citations in the corpus

Who are the active investors? Evidence from venture capital (2008, neutral): “However, the few studies that look at proprietary returns data (Cochrane (2005), Kaplan and Schoar (2005)) confirm that most of the returns come from these exit events.”
How Does Venture Capital Financing Improve Efficiency in Private Firms? A Look Beneath the Surface (2011, neutral): “…work by Gompers and Lerner (2000) who nd that pro t shares are higher for older and larger VCs. Similarly, these results are also related with those in Kaplan and Schoar (2005), who analyze both VC and buyout fund returns and show that there is a large degree of heterogeneity among fund returns.”
Leveraged Buyouts and Private Equity (2009, neutral): “They obtain qualitatively identical results to Kaplan and Schoar (2005) for the average returns and persistence of private equity / buyout funds relevant to this article.”
Playing to their Strengths? Evidence that Specialization in the Private Equity Industry Confers Competitive Advantage (2007, neutral): “in falling buyout market returns from IPOs over the same period (see Kaplan and Schoar, 2005 ).”
The Role of Top Management Team Human Capital in Venture Capital Markets: Evidence from First-Time Funds (2010, positive): “The findings support the idea that differences in venture capitalist human capital partially explain the documented heterogeneity and persistence in venture capital fund performance (e.g., Kaplan and Schoar (2005)).”
Performance persistence in entrepreneurship (2010, positive): “As has been shown by Sorensen (2007), Kaplan and Schoar (2005), Gompers, Kovner, Lerner, and Scharfstein (2008), and Hochberg, Ljungqvist, and Lu (2007), companies that are funded by more experienced (top-tier) venture capital firms are more likely to succeed.”
A New Method to Estimate Risk and Return of Nontraded Assets from Cash Flows: The Case of Private Equity Funds (2012, neutral): “We reestimate abnormal return and risk with i) final NAVs treated as fair market value (Kaplan and Schoar (2005)) and ii) writing final NAVs off (Phalippou and Gottschalg (2009)).”
The Private Equity Advantage: Leveraged Buyout Firms and Relationship Banking (2011, neutral): “20 using instrumental variables estimates) increase in equity return due to lower spread is risk independent and large in comparison to estimations of performance (alpha) that range from 2% to negative for leveraged buyouts in general (for example, see Groh and Gottschalg 2007; Kaplan and Schoar, 20”