Research seminars

Skill and Luck in Private Equity Performance

Finance

Speaker: Morten Sorensen
Copenhagen Business School

19 March 2015

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We evaluate the performance of private equity (PE) funds using a new variance decomposition model. A PE firm runs a sequence of funds with overlapping lives, which induces a large degree of spurious persistence. After adjusting for the overlap, we estimate the remaining spread in expected net-of-fee returns of top- and bottom-quartile PE firms to be 7 to 8 percentage points annually. Performance is noisy, however, and top-quartile past performance does not imply top-quartile future expected returns, especially for venture capital (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

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