Private equity performance: Returns, persistence, and capital flows

This paper investigates the performance and capital inflows of private equity partner-ships. Average fund returns (net of fees) approximately equal the S&P 500 although substantial heterogeneity across funds exists. Returns persist strongly across sub-sequent funds of a partnership. Better performing partnerships are more likely to raise follow-on funds and larger funds. This relationship is concave, so top performing partnerships grow proportionally less than average performers. At the industry level, market entry and fund performance are procyclical; however, established funds are less sensitive to cycles than new entrants. Several of these results differ markedly from those for mutual funds. THE PRIVATE EQUITY INDUSTRY, primarily venture capital (VC) and buyout (LBO) investments, has grown tremendously over the last decade. While investors committed less than $10 billion to private equity partnerships in 1991, they committed more than $180 billion at the peak in 2000 (see Jesse Reyes, Private Equity Overview and Update 2002). Despite the increased investment in th