Skill and Luck in Private Equity Performance

Abstract

[evdate 2014-12-04] IAS Conference on Entrepreneurship and Finance. Talk no.3 'IAS Conference on Entrepreneurship and Finance, paper presentation I.'

Title from event program.

IAS Conference on Entrepreneurship and Finance, held 4 Dec., 2014, at the Hong Kong University of Science and Technology. Sponsor, HKUST Jockey Club Institute for Advanced Study, and co-sponsor by Center for Asian Financial Markets, Department of Finance, HKUST.

Abstract: We evaluate the performance of private equity (PE) funds using a variance decomposition model that separates long- term, investable, and spurious persistence. We find a large amount of long-term persistence: the spread in the expected returns of top- and bottom-quartile PE firms is 7 to 8 percentage points annually. Performance is noisy, however, and top-quartile past performance does not imply top-quartile expected future returns, especially for VC firms. Based on past performance alone, an investor needs to observe an excessive number of funds to identify the PE firms with top-quartile expected returns, implying low investable persistence.

Duration: 33 min.