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Private Equity Fund Returns and Performance Persistence

Author

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  • Robert Marquez
  • Vikram Nanda
  • M. Deniz Yavuz

Abstract

Successful private equity managers have funds that are often oversubscribed and provide persistent abnormal returns. Why do not successful managers increase fund size or fees? We argue that managers want to attract high-quality entrepreneurs, while entrepreneurs want to match with high-ability managers. However, observing fund performance does not allow entrepreneurs to distinguish a manager’s ability from the quality of firms in the fund’s portfolio. As a consequence, a fund manager may devote unobserved effort to select firms, and keep fund size small to limit the cost of effort, hoping to manipulate entrepreneurs’ beliefs about his ability.

Suggested Citation

  • Robert Marquez & Vikram Nanda & M. Deniz Yavuz, 2015. "Private Equity Fund Returns and Performance Persistence," Review of Finance, European Finance Association, vol. 19(5), pages 1783-1823.
    • Handle: RePEc:oup:revfin:v:19:y:2015:i:5:p:1783-1823.
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    File URL: http://hdl.handle.net/10.1093/rof/rfu045
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    References listed on IDEAS

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    1. 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.
    2. Henry Chen & Paul Gompers & Anna Kovner & Josh Lerner, 2009. "Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion," NBER Working Papers 15102, National Bureau of Economic Research, Inc.
    3. Quigley, John M. & Woodward, Susan E., 2003. "An Index for Venture Capital," Department of Economics, Working Paper Series qt15g2h7g9, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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    Cited by:

    1. Umit Ozmel & Deniz Yavuz & Jeffrey J. Reuer & Todd Zenger, 2017. "Network Prominence, Bargaining Power, and the Allocation of Value Capturing Rights in High-Tech Alliance Contracts," Organization Science, INFORMS, vol. 28(5), pages 947-964, October.
    2. Korteweg, Arthur & Sorensen, Morten, 2017. "Skill and luck in private equity performance," Journal of Financial Economics, Elsevier, vol. 124(3), pages 535-562.
    3. Nicolas P. B. Bollen & Berk A. Sensoy, 2022. "How much for a haircut? Illiquidity, secondary markets, and the value of private equity," Financial Management, Financial Management Association International, vol. 51(2), pages 501-538, June.
    4. Liang, Weiping & Zhou, Xiangyi, 2024. "Why do entrepreneurial firms switch lead venture capital? A double-sided matching perspective," Research in International Business and Finance, Elsevier, vol. 72(PA).

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