Distorting Private Equity Performance: The Rise of Fund Debt
Have Private Equity Returns Really Declined?
James F. Albertus and Matthew Denes
This paper studies the emergence of debt financing by private equity funds. Using confidential (Burgiss) data on U.S. buyout funds, the authors document the increasing use of subscription lines of credit (SLCs) as an additional source of capital. They find that funds using SLCs tend to reduce the amount of equity invested relative to fund size and delay capital calls. Their results suggest that the use of SLCs increases IRR-based performance by 6.1 percentage points, while multiples-based performance slightly declines. Overall, they provide the first evidence on a new source of capital in private equity and its impact on funds.
Can Investors Time Their Exposure To Private Equity?
Greg Brown and Steve Kaplan
In a recent paper, “Demystifying Illiquid Assets – Expected Returns for Private Equity,” Ilmanen, Chandra and McQuinn (of AQR) give a perspective on the past, present, and expected future performance of private equity. They conclude that “private equity does not seem to offer as attractive a net-of-fee return edge over public market counterparts as it did 15-20 years ago from either a historical or forward-looking perspective.” This analysis provides our perspective based on more recent and, we think, more reliable data and performance measures – the historical perspective is more positive than Ilmanen et al. portray.
Performance of Private Credit Funds
Brown, Greg, Hu, Wendy, Jenkinson, Tim, Kaplan, Steve, and Robinson, David
Private equity performance, both for buyouts and venture capital, has been highly cyclical: periods of high fundraising have been followed by periods of low absolute performance. Despite this seemingly predictable variation, we find modest gains, at best, to pursuing more realistic, investable strategies that time capital commitments to private equity. This occurs because investors can only time their commitments to fund
Volatility and Venture Capital
Shawn Munday, Wendy Hu, Tobias True, Jian Zhang
Although private credit funds have rapidly grown into a standalone asset class over the last decade, little is known about the aggregate performance of these funds. To provide a first look at absolute and relative performance, we utilize the Burgiss database of 476 private credit funds with nearly $480 billion in committed capital, including a subset of 155 direct lending funds. We review the recent trends within private credit, provide an overview of various strategies,
Private Equity in the Global Economy: Evidence of Industry Spillovers
Ryan H. Peters
The performance of venture capital (VC) investments load positively on shocks to aggregate return volatility. I document this novel source of risk at the asset-class, fund, and portfolio-company levels. The positive relation between VC performance and volatility is driven by the option-like structure of VC investments, especially by VCs’ contractual option to invest in subsequent (follow-on) rounds. At the asset-class level, shocks to aggregate volatility explain a substantial fraction of VC returns.
Venture Capital and Career Concerns
Aldatmaz, Serdar and Brown, Gregory W.
Using a novel dataset on global private equity investments in 19 industries across 48 countries, we find that following investments by private equity funds labor productivity, employment, profitability, and capital expenditures increase for publicly-listed companies in the same country and industry. This suggests that positive externalities created by private equity firms are absorbed by other companies within the same industry.
The Persistence of PE Performance
This paper finds evidence that the market for follow-on capital discourages risk taking by venture capital fund managers. The amount of follow-on capital raised by venture capitalists is concave with respect to current fund performance. In addition, managers with less consistent performance are
Do Private Equity Funds Manipulate Reported Returns?
Greg Brown, Raymond Chan, Wendy Hu, Kelly Meldrum, Tobias True
Private equity (PE) investments have become an increasingly important allocation in institutional portfolios. How- ever, investing in private equity requires considering several factors not relevant to investments in public equity. Perhaps the biggest difference is that a commitment in a private equity fund is not an investment in existing (e.g., publicly traded) securities with a manager whose track record is easily observed. In fact, because investors almost never have information on what companies they will be investing in, they are putting faith in an organization, a fund’s stated investment strategy, and even specific individuals.
Financial Intermediation in Private Equity: How Well Do Funds of Funds Perform?
Greg Brown, Oleg Gredil, Steven N. Kaplan
Private equity funds hold assets that are hard to value. Managers may have an incentive to distort reported valuations if these are used by investors to decide on commitments to subsequent funds managed by the same firm. Using a large dataset of buyout and venture funds, we test for the presence of reported return manipulation. We find evidence that some underperforming managers inflate reported returns during times when fundraising takes place. However
Private Equity Net Asset Values and Future Cash Flows
Robert S. Harris, Tim Jenkinson, Steven N. Kaplan, Rüdiger Stucke
This paper focuses on funds of funds (FOFs) as a form of financial intermediation in private equity (both buyout and venture capital). After accounting for fees, FOFs provide returns equal to or above public market indices for both buyout and venture capital. While FOFs focusing on buyouts outperform public markets
Oil Price Movements and Risks of Energy Investments
Tim Jenkinson, Wayne R. Landsman, Brian Rountree, Kazbi Soonawalla
This paper analyzes whether fund valuations produced by private equity managers are biased predictors of future discounted cash flows (DCF). Our research is based on an extensive set of timed cash flows and reported net asset values (NAVs) that relates to 645 funds spanning 1988-2014. Using an ex ante lens, we find that, on average, reported NAVs converge on the future DCF early in the life of the fund. This result is particularly interesting to investors for whom unbiased asset valuations are important in keeping portfolios optimally allocated
A Bottom-Up Approach to the Risk-Adjusted Performance of the Buyout Fund Market
Gregory Brown, Raymond Chan, Wendy Hu, Jian Zhang
This study examines the historical relation between oil price movements and both public and private equity investments in the energy sector. By utilizing two proprietary private equity databases (one at the fund-level and the other at the company-level), we are able to show that investments in energy focused private equity offer diversification benefits relative
What Do Different Commercial Data Sets tell Us About Private Equity Performance?
Jean-François L’Her, Rossitsa Stoyanova, Kathryn Shaw, William Scott, Charissa Lai
We use the Burgiss dataset to study private equity buyout fund performance. Our findings on performance before risk adjustments are consistent with those in the literature and indicate significant outperformance of buyout fund investments. Using a bottom-up approach, we identify the systematic risks of
Performance of Non-Core Private Equity Real Estate Funds: A European View
Greg Brown, Robert Harris, Tim Jenkinson, Steven N. Kaplan, David Robinson
This paper examines private equity (both buyout and venture funds) performance around the globe using four data sets from leading commercial sources. For North American funds, our results echo recent research findings: buyout funds have outperformed public equities over long periods of time; in contrast, venture funds saw performance fall after spectacular results for vintages in the 1990s. For funds outside North America,
Market Timing and Agency Costs: Evidence from Private Equity
Sami Kiehela, Heidi Falkenbach
This article examines the performance of European private equity real estate (PERE) funds from 1998 to 2009 using both absolute and relative performance metrics. The authors find that PERE fund absolute returns were significantly dragged down by the financial crisis and, on average, delivered only weak absolute returns. In relative terms, they find that private equity real estate funds underperform
Class Differences in Real Estate Private Equity Fund Performance
Private equity (PE) funds operate at the interface of private and public capital markets. This paper investigates whether PE fund managers have private information about the valuations of publicly traded securities. Using a dataset of cash flows from 941 buyout and venture funds, I show that PE funds' distribution patterns predict returns of public securities in the industries of the funds' specialization, but fund managers tend to sell at the market peaks
How Do Private Equity Investments Perform Compared to Public Equity?
Lynn M. Fisher, David J. Hartzell
Real estate private equity (REPE) funds are often differentiated by risk class: Core, Value-Added, or Opportunistic. Fund class is used by investors and managers to allocate funds and to describe investment policies. In this paper, we use REPE fund cash flow data from Burgiss that allow us to calculate a variety of performance metrics. For a subset of the data, we also observe characteristics of underlying fund holdings.
Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds.
Robert S. Harris, Tim Jenkinson, Steven N. Kaplan
The merits of investing in private versus public equity have generated considerable debate, often fueled by concerns about data quality. In this paper, we use cash flow data derived from the holdings of almost 300 institutional investors to study over 1,800 North American buyout and venture capital funds. Average buyout fund returns for all vintage years but one before 2006 have exceeded those from public markets; averaging about 3% to 4% annually. Post-2005 vintage year returns
Benchmarking Private Equity: The Direct Alpha Method
Robert S. Harris, Tim Jenkinson, Steven N. Kaplan, Rüdiger Stucke
The conventional wisdom for investors in private equity funds is to invest in partnerships that have performed well in the past. This is based on the belief that performance in private equity persists across funds of the same partnership. We present new evidence on the persistence of U.S. private equity (buyout and venture capital) funds using a research-quality dataset from Burgiss, sourced from over 200 institutional investors. Relying on detailed cash-flow data for funds, we study the persistence of buyout and venture capital fund performance of the same general partners across different funds.
Oleg Gredil, Barry E. Griffiths, Rüdiger Stucke
We reconcile the major approaches in the literature to benchmark cash flow-based returns of private equity investments against public markets, a.k.a. 'Public Market Equivalent' methods. We show that the existing methods to calculate annualized excess returns are heuristic in nature, and propose an advanced approach, the 'Direct Alpha' method, to derive the precise rate of excess return between the cash flows of illiquid assets