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RFS Advance Access originally published online on March 19, 2008
Review of Financial Studies 2009 22(4):1747-1776; doi:10.1093/rfs/hhn014
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© The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org.

The Performance of Private Equity Funds

Ludovic Phalippou
University of Amsterdam

Oliver Gottschalg
HEC Paris

Send correspondence to Ludovic Phalippou, University of Amsterdam, FEE, Finance Group, 11 Roerterstraat, 1018 Amsterdam, The Netherlands; telephone: (31) 20-525-4153; e-mail: l.phalippou{at}uva.nl.

JEL Classification: G23, G24


  Abstract

The performance of private equity funds as reported by industry associations and previous research is overstated. A large part of performance is driven by inflated accounting valuation of ongoing investments and we find a bias toward better performing funds in the data. We find an average net-of-fees fund performance of 3% per year below that of the S&P 500. Adjusting for risk brings the underperformance to 6% per year. We estimate fees to be 6% per year. We discuss several misleading aspects of performance reporting and some side benefits as a first step toward an explanation.

We thank Gemma Postlethwaite, Jesse Reyes, and Thomson Venture Economics for making this project possible through generous access to their databases. We are especially grateful to Antoinette Schoar, who helped us to replicate her results. We also thank an anonymous referee, Bernard Dumas, Alexander Groh, Ulrich Hege, Raj Iyer, Tim Jenkinson (WFA discussant), Ron Kaniel, Robert Kosowski, Josh Lerner, Dima Leshchinskii, Alexander Ljungqvist, Florencio Lopez-de-Silanes, Pedro Matos, Andrew Metrick, Eric Nowak, Manju Puri, Anna Scherbina, Clemens Sialm (EFA discussant), Per Stromberg, Charles Trzcinka (FFC discussant), Annette Vissing-Jorgensen, Michael Weisbach (the editor), Maurizio Zollo, and audiences at INSEAD, Toulouse BS, UC Dublin, SIFR-Stockholm, EFMA meeting, CEPR meeting, EFA meeting, Frontiers of Finance Conference, Gutmann Center Symposium, Inquire-UK meeting, and WFA meeting for their comments. Financial support from the R&D Department at INSEAD, Fondation HEC, and the Wharton-INSEAD Alliance is gratefully acknowledged.


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