Performance evaluation and Persistence in Private Equity
Performance Persisted in Private Equity: The first paper studies the performance and persistence of U.S. buyout funds with updated and detailed cash flow data from a publicly available database. I find substantial heterogeneity in performance exists across post-2000 funds and the better performing funds sustain their outperformance across successive funds of the same GP. When current funds are sorted by the quartile performance of their previous fund, performance of the current funds with previous fund in the top quartile is economically and statistically better than current funds with previous fund in the other quartiles across absolute and relative performance metrics. Regression results further confirm the presence of persistence across funds of the same partnerships and it resides in both outperformers and underperformers. The persistence results are robust to controls for current fund size and change in fund size, market risk, sorting with different performance metrics, and strengthens when I restrict funds up till 2005 only to further mitigate the impact of unrealized value. These findings contrast with those in recent persistent research because I was able to evaluate the post-2000 funds at a mature stage of their investment life rather than due to differences in dataset. My updated dataset also shows scalability of private equity performance. Performance of post-2000 funds and top quartile funds in particular has held up as well as pre-2001 funds despite experiencing the global financial crisis and substantial increase in industry size and competition. Larger funds in particular perform better. Access to well performing funds and investor due diligence to identify skilful GPs remain an important competitive advantage in private equity to produce superior performance for investors.
Finding Top Quartile Private Equity Funds:The second paper argues however that identifying these top quartile funds is not straightforward due to poor data availability and lack of standardization of industry practice that can lead to misleading conclusions on who is top quartile and their persistence. I show that GP’s discretion in picking between databases, vintage years and investment universes can significantly improve their quartile placement. As a result, many more funds than 25% can claim to be top quartile. Majority of bottom quartile funds can even be disguised as top quartile once these discretion are astutely applied. This could explain why bottom quartile GPs continue to raise follow on funds. Investing in the current funds of previous top quartile funds that are presented as top quartile somewhere somehow also lead to performance that are not different from current funds with previous funds that are non-top quartile, and the likelihood that the follow on fund of these “selected” funds will be top quartile is close to random. These results contrasts with the persistence findings if one were to sort the top quartile funds rigorously. More comprehensive and detailed data, and standardization to assess private equity robustly amongst peers will help LPs identify the true outperformers in private equity.
Supervisor: Florencio Lopez-de-Silanes , EDHEC Business School
External reviewer: Ludovic Phalippou, University of Oxford
Other committee member: René Garcia, EDHEC Business School