Skill and Luck in Private Equity Performance

Arthur Korteweg, Morten Sørensen

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

Private equity (PE) performance is persistent, with PE firms consistently producing high (or low) net-of-fees returns. We use a new variance decomposition model to isolate three components of persistence. We find high long-term persistence: the spread in expected net-of-fee future returns between top and bottom quartile PE firms is 7–8 percentage points annually. This spread is estimated controlling for spurious persistence, which arises mechanically from the overlap of contemporaneous funds. Performance is noisy, however, making it difficult for investors to identify the PE funds with top quartile expected future performance and leaving little investable persistence.
Private equity (PE) performance is persistent, with PE firms consistently producing high (or low) net-of-fees returns. We use a new variance decomposition model to isolate three components of persistence. We find high long-term persistence: the spread in expected net-of-fee future returns between top and bottom quartile PE firms is 7–8 percentage points annually. This spread is estimated controlling for spurious persistence, which arises mechanically from the overlap of contemporaneous funds. Performance is noisy, however, making it difficult for investors to identify the PE funds with top quartile expected future performance and leaving little investable persistence.
LanguageEnglish
JournalJournal of Financial Economics
Volume124
Issue number3
Pages535-562
ISSN0304-405X
DOIs
StatePublished - 2017

Keywords

  • Persistence
  • Private equity
  • Venture capital
  • Skill
  • Learning

Cite this

Korteweg, Arthur ; Sørensen, Morten. / Skill and Luck in Private Equity Performance. In: Journal of Financial Economics. 2017 ; Vol. 124, No. 3. pp. 535-562
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Skill and Luck in Private Equity Performance. / Korteweg, Arthur; Sørensen, Morten.

In: Journal of Financial Economics, Vol. 124, No. 3, 2017, p. 535-562.

Research output: Contribution to journalJournal articleResearchpeer-review

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AU - Korteweg,Arthur

AU - Sørensen,Morten

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AB - Private equity (PE) performance is persistent, with PE firms consistently producing high (or low) net-of-fees returns. We use a new variance decomposition model to isolate three components of persistence. We find high long-term persistence: the spread in expected net-of-fee future returns between top and bottom quartile PE firms is 7–8 percentage points annually. This spread is estimated controlling for spurious persistence, which arises mechanically from the overlap of contemporaneous funds. Performance is noisy, however, making it difficult for investors to identify the PE funds with top quartile expected future performance and leaving little investable persistence.

KW - Persistence

KW - Private equity

KW - Venture capital

KW - Skill

KW - Learning

KW - Persistence

KW - Private equity

KW - Venture capital

KW - Skill

KW - Learning

U2 - 10.1016/j.jfineco.2017.03.006

DO - 10.1016/j.jfineco.2017.03.006

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