Giants at the Gate: On the Cross-Section of Private Equity Investment Returns

This study examines the determinants of private equity returns using a newly constructed worldwide database of 7,500 investments made over forty years.

Author(s):

Florencio Lopez-de-Silanes

Professor of Finance, EDHEC Business School

Ludovic Phalippou

University of Amsterdam Business School and Tinbergen Institute

Oliver Gottschalg

HEC Paris

The median investment IRR (PME) is 21% (1.3), gross of fees. One in ten investments goes bankrupt, whereas one in four has an IRR above 50%. Only one in eight investments is held for less than two years, but such investments have the highest returns. The scale of private equity firms is a significant driver of returns: investments held at times of a high number of simultaneous investments underperform substantially. The median IRR is 36% in the lowest scale decile and 16% in the highest. Results survive robustness tests. Diseconomies of scale are linked to firm structure: independent firms, less hierarchical firms, and those with managers of similar professional backgrounds exhibit smaller diseconomies of scale.

Type: Working paper
Date: le 31/01/2011
Research Cluster : Finance

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