Private Equity: Lucrative Characteristics

Tobias Clemens Müller Wexøe-Mikkelsen & Lau Winther Jepsen

Student thesis: Master thesis


This thesis investigates the correlation between private equity funds’ internal rate of return and six characteristics: geographical location, size, vintage, industry, prior funds established by a manager and strategy. A data set of more than 30,000 private equity funds from Preqin was used in the thesis, although this number was reduced to 3797 after filtering for incomplete data, geographical outliers and irrelevant vintages. In order to determine whether or not each characteristic is significantly affecting the Internal rate of return, one or more multiple regressions were run on each specific factor. When supplementary, the additional interpretation of Sharpe ratios was used. The findings of the thesis include the result that the size of the fund as well as the experience of the manager are statistically insignificant when it comes to the prediction of a private equity fund’s IRR. This contradicts widely cited literature on the subject (Kaplan and Schoar, 2005). Industry and strategy are both significantly affecting a private equity fund’s performance, with the Clean Tech industry resulting in overall negative returns for its fund. Of the three geographical locations included in the analysis, we find that European-focused private equity funds have a significantly higher expected IRR than its US counterpart. We are however unable to reject the null hypothesis equating the performance of the Asian and American Private equity funds. Which vintage a fund is established also has a significant impact on its performance, and IRR is also shown to be correlated with the conjectures of both the global and regional stock market. Ultimately a full model was constructed integrating the relevant factors, achieving the best explanatory power of all of the regression models, and is thus the best tool for predicting the performance of a specific fund. Despite this, the interpretational value of its coefficients and their significance-statistics is intuitively dubious.

EducationsMSc in Finance and Investments, (Graduate Programme) Final ThesisMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2018
Number of pages104