The Performance of Private Equity: Evidence from Confidential Filings

Abstract

Whereas prior studies in the literature have presented mixed, and at times conflicting, results due to their use of data voluntarily reported by private equity funds to third party vendors for the purpose of advertising, my study is the first to overcome these sample selection bias issues by analyzing comprehensive performance and investment data from the confidential regulatory SEC Form PF filings of US private equity funds. I establish several new findings. First, private equity has seen the fastest growth of all alternative investment asset classes in the last decade. During this time, private equity investment concentrations have shifted towards information technology, manufacturing, financial services, and professional services, and away from transportation/warehousing, retail trade, and mining/quarrying/gas-oil extraction. Second, private equity returns and reward-to-risk ratios exceed those of comparable stock market investments for nearly every major business industry. Third, private equity returns and reward-to-risk ratios demonstrate strong economies of scale. Fourth, while private equity returns exhibit dis-economies of scope, the reduction in risk via industry diversification outweighs this loss, leading to a rise in reward-to-risk ratios as private equity funds increase the number of distinct industries in their investment portfolios. Fifth, I find that portfolio company leverage does not yield any excess return premium, suggesting that leveraged buyout strategies, which carry default risk and potential issues of debt overhang, do not reward private equity funds with any additional risk compensation. These results are valid for returns to limited partners as well as general partners.