The Performance of Private Equity Funds

L. Phalippou, O. GOTTSCHALG

Review of Financial Studies

April 2009, vol. 22, n°4, pp.1747-1776

Departments: Strategy & Business Policy, GREGHEC (CNRS)

Keywords: Financial investments, Private equity, Capital investments, Investment funds, Fees, Investors, Cash flow, Venture capital, Datasets, Investment strategies

The performance of private equity funds as reported by industry associations and previous research is overstated. A large part of performance is driven by inflated accounting valuation of ongoing investments and we find a bias toward better performing funds in the data. We find an average net-of-fees fund performance of 3% per year below that of the S&P 500. Adjusting for risk brings the underperformance to 6% per year. We estimate fees to be 6% per year. We discuss several misleading aspects of performance reporting and some side benefits as a first step toward an explanation