Private Equity Fund Returns: Do Managers Actually Leave Money on the Table?

32 Pages Posted: 17 Mar 2010

See all articles by Robert Marquez

Robert Marquez

University of California, Davis

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

M. Deniz Yavuz

Purdue University - Krannert School of Management

Date Written: March 15, 2010

Abstract

Evidence indicates that private equity funds, unlike mutual funds, deliver persistent abnormal returns and that the top performing funds are often oversubscribed. Why do private equity funds appear to leave money on the table, rather than increasing fund size? We argue that private equity funds are fundamentally different from mutual funds because their success is contingent on their matching with high quality firms (entrepreneurs). Firms also want to match with managers that have higher estimated value adding ability. This gives managers an incentive to manipulate firms' beliefs about their ability by providing higher returns. Managers limit fund size, fees or both even if firms are not fooled in equilibrium. The model explains the puzzle and provides several new time series and cross sectional predictions about fund performance, fees and size. For example, venture capital funds should have stronger performance persistence and lower sensitivity of size to past returns compared to that of buyout funds.

Keywords: venture capital, private equity, performance persistence, signal jamming, leveraged buyout, fund size and fees

Suggested Citation

Marquez, Robert S. and Nanda, Vikram K. and Yavuz, M. Deniz, Private Equity Fund Returns: Do Managers Actually Leave Money on the Table? (March 15, 2010). Available at SSRN: https://ssrn.com/abstract=1571180 or http://dx.doi.org/10.2139/ssrn.1571180

Robert S. Marquez

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

M. Deniz Yavuz (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

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