IDEAS home Printed from https://ideas.repec.org/a/bla/eufman/v15y2009i3p643-675.html
   My bibliography  Save this article

What Drives Private Equity Returns?– Fund Inflows, Skilled GPs, and/or Risk?

Author

Listed:
  • Christian Diller
  • Christoph Kaserer

Abstract

This paper analyzes the determinants of returns generated by mature European private equity funds. It starts from the presumption that this asset class is characterized by illiquidity, stickiness, and segmentation. Given this presumption, Gompers and Lerner (2000) have shown that venture deal valuations are driven by overall fund inflows into the industry that yield the putative ‘money chasing deals’ phenomenon. It is the aim of this paper to show that this phenomenon explains a significant part of the variation in private equity funds' returns. This is especially true for venture funds, as they are affected more by illiquidity and segmentation than buy†out funds. In the context of a WLS†regression approach the paper reports a highly significant impact of total fund inflows on fund returns. It can also be shown that private equity funds' returns are driven by GP's skills as well as stand†alone investment risk. In a bootstrapping context we can show that most of these results are quite stable.

Suggested Citation

  • Christian Diller & Christoph Kaserer, 2009. "What Drives Private Equity Returns?– Fund Inflows, Skilled GPs, and/or Risk?," European Financial Management, European Financial Management Association, vol. 15(3), pages 643-675, June.
    • Handle: RePEc:bla:eufman:v:15:y:2009:i:3:p:643-675
    DOI: 10.1111/j.1468-036X.2007.00438.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1468-036X.2007.00438.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1468-036X.2007.00438.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Alexander Ljungqvist & Matthew Richardson, 2003. "The cash flow, return and risk characteristics of private equity," NBER Working Papers 9454, National Bureau of Economic Research, Inc.
    2. Brown, Stephen J & Goetzmann, William N, 1995. "Performance Persistence," Journal of Finance, American Finance Association, vol. 50(2), pages 679-698, June.
    3. Steven N. Kaplan & Antoinette Schoar, 2005. "Private Equity Performance: Returns, Persistence, and Capital Flows," Journal of Finance, American Finance Association, vol. 60(4), pages 1791-1823, August.
    4. James G. MacKinnon, 2002. "Bootstrap inference in econometrics," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 35(4), pages 615-645, November.
    5. Rogér Otten & Dennis Bams, 2007. "The Performance of Local versus Foreign Mutual Fund Managers," European Financial Management, European Financial Management Association, vol. 13(4), pages 702-720, September.
    6. Ross M. Miller, 2005. "Measuring the True Cost of Active Management by Mutual Funds," Finance 0506010, University Library of Munich, Germany, revised 02 Aug 2005.
    7. Daniel, Kent, et al, 1997. "Measuring Mutual Fund Performance with Characteristic-Based Benchmarks," Journal of Finance, American Finance Association, vol. 52(3), pages 1035-1058, July.
    8. Oliver Gottschalg & D. Zipser, 2006. "Money Chasing Deals and Deals Chasing Money - The Impact of Supply and Demand on Buyout Performance," Post-Print halshs-00120988, HAL.
    9. Cochrane, John H., 2005. "The risk and return of venture capital," Journal of Financial Economics, Elsevier, vol. 75(1), pages 3-52, January.
    10. Goetzmann, William N. & Ingersoll, Jonathan & Ivković, Zoran, 2000. "Monthly Measurement of Daily Timers," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(3), pages 257-290, September.
    11. Malkiel, Burton G, 1995. "Returns from Investing in Equity Mutual Funds 1971 to 1991," Journal of Finance, American Finance Association, vol. 50(2), pages 549-572, June.
    12. Oliver Gottschalg & D. Zipser, 2006. "Money Chasing Deals and Deals Chasing Money - The Impact of Supply and Demand on Buyout Performance," Post-Print halshs-00125917, HAL.
    13. Madura, Jeff & Bers, Martina K., 2002. "The performance persistence of foreign closed-end funds," Review of Financial Economics, Elsevier, vol. 11(4), pages 263-285.
    14. Oliver Gottschalg, 2006. "Money chasing deals and deals chasing money," Post-Print halshs-00121064, HAL.
    15. Crystal Yan Lin & Kenneth Yung, 2004. "Real Estate Mutual Funds: Performance and Persistence," Journal of Real Estate Research, American Real Estate Society, vol. 26(1), pages 69-94.
    16. John A. Doukas & Nikolaos T. Milonas, 2004. "Investor Sentiment and the Closed‐end Fund Puzzle: Out‐of‐sample Evidence," European Financial Management, European Financial Management Association, vol. 10(2), pages 235-266, June.
    17. Jonathan B. Berk, 2004. "Valuation and Return Dynamics of New Ventures," The Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 1-35.
    18. Ingolf Dittmann & Ernst Maug & Johannes Kemper, 2004. "How Fundamental are Fundamental Values? Valuation Methods and their Impact on the Performance of German Venture Capitalists," European Financial Management, European Financial Management Association, vol. 10(4), pages 609-638, December.
    19. Gottshalg, Oliver & Zipser, Daniel, 2006. "Money chasing deals and chasing money - the impact of supply and demand on buyout performance," HEC Research Papers Series 851, HEC Paris.
    20. Inderst, Roman & Muller, Holger M., 2004. "The effect of capital market characteristics on the value of start-up firms," Journal of Financial Economics, Elsevier, vol. 72(2), pages 319-356, May.
    21. Deaves, Richard, 2004. "Data-conditioning biases, performance, persistence and flows: The case of Canadian equity funds," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 673-694, March.
    22. Henriksson, Roy D, 1984. "Market Timing and Mutual Fund Performance: An Empirical Investigation," The Journal of Business, University of Chicago Press, vol. 57(1), pages 73-96, January.
    23. Diller, Christian & Kaserer, Christoph, 2004. "European private equity funds: A cash flow based performance analysis," CEFS Working Paper Series 2004-01, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
    24. Hendricks, Darryll & Patel, Jayendu & Zeckhauser, Richard, 1993. "Hot Hands in Mutual Funds: Short-Run Persistence of Relative Performance, 1974-1988," Journal of Finance, American Finance Association, vol. 48(1), pages 93-130, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Andrew Metrick & Ayako Yasuda, 2011. "Venture Capital and Other Private Equity: a Survey," European Financial Management, European Financial Management Association, vol. 17(4), pages 619-654, September.
    2. Nanda, Ramana & Samila, Sampsa & Sorenson, Olav, 2020. "The persistent effect of initial success: Evidence from venture capital," Journal of Financial Economics, Elsevier, vol. 137(1), pages 231-248.
    3. Ann†Kristin Achleitner & Christian Figge, 2014. "Private Equity Lemons?Evidence on Value Creation in Secondary Buyouts," European Financial Management, European Financial Management Association, vol. 20(2), pages 406-433, March.
    4. Gael Imad'Eddine & Armin Schwienbacher, 2013. "International Capital Flows into the European Private Equity Market," European Financial Management, European Financial Management Association, vol. 19(2), pages 366-398, March.
    5. Sang-Jun Shin & Keun-Tae Cho, 2022. "Human Resources, Investor Composition and Performance of Venture Funds: Focused on the Stakeholders of Venture Funds," Sustainability, MDPI, vol. 14(24), pages 1-21, December.
    6. Ranko Jelic & Mike Wright, 2011. "Exits, Performance, and Late Stage Private Equity: the Case of UK Management Buy†outs," European Financial Management, European Financial Management Association, vol. 17(3), pages 560-593, June.
    7. Maiia Sleptcova & Heidi Falkenbach, 2021. "Managerial Skill and European PERE Fund Performance," The Journal of Real Estate Finance and Economics, Springer, vol. 62(4), pages 665-690, May.
    8. Sebastian Ernst & Christian Koziol & Denis Schweizer, 2013. "Are Private Equity Investors Boon or Bane for an Economy?–A Theoretical Analysis," European Financial Management, European Financial Management Association, vol. 19(1), pages 180-207, January.
    9. Douglas Cumming & Grant Fleming & Sofia A. Johan, 2011. "Institutional Investment in Listed Private Equity," European Financial Management, European Financial Management Association, vol. 17(3), pages 594-618, June.
    10. Humphery-Jenner, M., 2011. "Diversification in Private Equity Funds : On Knowledge-sharing, Risk-aversion and Limited-attention," Other publications TiSEM 3e22d8a9-6846-484f-a09e-7, Tilburg University, School of Economics and Management.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kaserer, Christoph & Diller, Christian, 2004. "What drives cash flow based European private equity returns? Fund inflows, skilled GPs and/or risk?," CEFS Working Paper Series 2004-02, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
    2. Ferson, Wayne E., 2013. "Investment Performance: A Review and Synthesis," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 969-1010, Elsevier.
    3. Anjum, Sohail & Qayyum, Unbreen & Qureshi, Madeeha Gohar, 2019. "Aggregate performance evaluation of US Equity Mutual Funds - Explaining the performance of Growth Funds vs. Value Funds," MPRA Paper 100043, University Library of Munich, Germany.
    4. Veeravel. V & A. Balakrishnan, 2023. "Persistence of Large-Cap Equity Funds performance, market timing ability, and selectivity: evidence from India," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(1), pages 37-48, March.
    5. Konstantina Pendaraki & Michael Doumpos & Constantin Zopounidis, 2003. "Assessing Equity Mutual Funds' Performance Using a Multicriteria Methodology: A Comparative Analysis," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 1(1), pages 85-104.
    6. Andrew Clare & Mariana Clare, 2019. "An examination of ex ante fund performance: identifying indicators of future performance," Journal of Asset Management, Palgrave Macmillan, vol. 20(3), pages 175-195, May.
    7. Herrmann, Ulf & Scholz, Hendrik, 2013. "Short-term persistence in hybrid mutual fund performance: The role of style-shifting abilities," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2314-2328.
    8. Pankaj K. Agarwal & H. K. Pradhan, 2018. "Mutual Fund Performance Using Unconditional Multifactor Models: Evidence from India," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 17(2_suppl), pages 157-184, August.
    9. Du, Ding & Huang, Zhaodan & Blanchfield, Peter J., 2009. "Do fixed income mutual fund managers have managerial skills?," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 378-397, May.
    10. Dirk Bergemann & Ulrich Hege & Liang Peng, 2008. "Venture Capital and Sequential Investments," Cowles Foundation Discussion Papers 1682R2, Cowles Foundation for Research in Economics, Yale University, revised Oct 2009.
    11. Lauren Cohen & Andrea Frazzini & Christopher Malloy, 2008. "The Small World of Investing: Board Connections and Mutual Fund Returns," Journal of Political Economy, University of Chicago Press, vol. 116(5), pages 951-979, October.
    12. Andrew Metrick & Ayako Yasuda, 2011. "Venture Capital and Other Private Equity: a Survey," European Financial Management, European Financial Management Association, vol. 17(4), pages 619-654, September.
    13. Detzel, F. Larry & Weigand, Robert A., 1998. "Explaining Persistence in Mutual Fund Performance," Financial Services Review, Elsevier, vol. 7(1), pages 45-55.
    14. Ioannis D Vrontos & Loukia Meligkotsidou & Spyridon D Vrontos, 2011. "Performance evaluation of mutual fund investments: The impact of non-normality and time-varying volatility," Journal of Asset Management, Palgrave Macmillan, vol. 12(4), pages 292-307, September.
    15. Omneya Abdelsalam & Meryem Duygun & Juan Carlos Matallín-Sáez & Emili Tortosa-Ausina, 2014. "Is Ethical Money Sensitive to Past Returns? The Case of Portfolio Constraints and Persistence of Islamic and Socially Responsible Funds," Working Papers 2014/19, Economics Department, Universitat Jaume I, Castellón (Spain).
    16. Kasper Meisner Nielsen, 2011. "The Return to Direct Investment in Private Firms: New Evidence on the Private Equity Premium Puzzle," European Financial Management, European Financial Management Association, vol. 17(3), pages 436-463, June.
    17. Boyan Jovanovic & Balàzs Szentes, 2007. "On the Return to Venture Capital," NBER Working Papers 12874, National Bureau of Economic Research, Inc.
    18. Robinson, David T. & Sensoy, Berk A., 2016. "Cyclicality, performance measurement, and cash flow liquidity in private equity," Journal of Financial Economics, Elsevier, vol. 122(3), pages 521-543.
    19. Elton, Edwin J. & Gruber, Martin J., 2013. "Mutual Funds," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1011-1061, Elsevier.
    20. Angelidis, Timotheos & Giamouridis, Daniel & Tessaromatis, Nikolaos, 2013. "Revisiting mutual fund performance evaluation," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1759-1776.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:eufman:v:15:y:2009:i:3:p:643-675. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/efmaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.