Is private equity performance persistence related to the skill of fund managers and which other factors may explain it?
Abstract
Whether fund managers have skill in managing their portfolios, and whether this
skill allows them to persistently generate superior returns for investors are crucial
questions for investors’ capital allocation decisions. In this thesis, we study
performance persistence in private equity and investigate the relationship between
skill and persistence, as well as look into other factors that may affect this
relationship. We find that that there is persistence for the first follow-on fund, but
it decreases drastically already from the second follow-on fund. When tested for the
similarity of market conditions, it does not help to explain persistence. Therefore,
short-term persistence may be attributed to the skill of general partners. The lack of
long-term persistence may be explained by the decreasing returns to scale. This
factor is especially strong in eroding performance persistence in venture capital
funds, while the managers of buyout funds seem to have more scalable skills.
Finally, persistence is stronger for worse performing funds. This, however, does not
necessarily mean the lack of skill of good-performing managers. It can also mean
that they are backed by sophisticated investors who make more informed capital
allocation decisions and cause the flow of funds to decrease performance
persistence due to the diseconomies of scale. Overall, the findings are not
conclusive about the skill of fund managers due to the limitations of this work.
However, they shed light on some important considerations for investors and
provide grounds for further research.
Description
Masteroppgave(MSc) in Master of Science in Business, Finance - Handelshøyskolen BI, 2019