Evaluating Private Equity Returns from the Investor Perspective - are Limited Partners Getting Carried Away?

Sammanfattning: In this study, we evaluate the performance of close to 900 buyout and venture capital funds from 1979 to 2008. Returns are measured using traditional performance measures, the internal rate of return and the investment multiple, as well as four different Public Market Equivalent measures, which compares private equity fund returns to the returns of corresponding investments in a publicly traded index. Limiting the sample to funds from the 1990's and the 2000's, we find that buyout funds have consistently outperformed the S\&P 500, whereas venture capital funds have shown more volatile returns, outperforming in the 1990's and underperforming in the 2000's. We also observe a negative relationship between venture capital and buyout fund returns, implying possible diversification benefits for investors who seek less volatile returns, but at the cost of a lower alpha. Further, our findings suggest that there is a concave relationship between fund sequence and returns, controlling for size and year-fixed effects. Our results also show that the choice of benchmark is an important aspect for an investor to consider, as well as whether or not to hedge fund cash flows, as both decisions will have large effects on relative and absolute returns, respectively. Finally, we invent a method for measuring whether general partners have been successful in timing the market. For each fund, we create two hypothetical portfolios, one with a fund mimicking strategy and the other with a naive investment approach. We find that the simulated returns from the naive investment approach are superior to those achieved from the mimicking strategy overall, implying that the general partners in our data have not been successful in timing the market.