Private Equity Fund Size, Investment Size, and Value Creation

Humphery-Jenner, Mark

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Private Equity Fund Size, Investment Size, and Value Creation

Review of Finance, Vol. 16, No. 3, 2012

67 Pages Posted: 13 Jun 2010 Last revised: 5 Aug 2012

See all articles by Mark Humphery-Jenner

Mark Humphery-Jenner

University of New South Wales (UNSW); UNSW Business School; Financial Research Network (FIRN)

Date Written: 2012

Abstract

This paper examines why large PE funds earn lower returns. I argue that large PE-funds are suited to making large investments and small PE-funds are suited to nurturing start-ups. Thus, the sub-optimal investment in small companies is one driver of the size effect in private equity. A theoretical model and empirical results from a sample of 1222 funds in the United States support this prediction. The largest 25% of PE funds earn IRRs of 5.17% when they invest in the largest 25% of companies but only -2.98% when they invest in the smallest 25%. This suggests that investment size is a driver of the size effect in private equity.

Keywords: Private Equity, Size Effect, Venture Capital

JEL Classification: G11, G24, M13

Suggested Citation: Suggested Citation

Humphery-Jenner, Mark and Humphery-Jenner, Mark, Private Equity Fund Size, Investment Size, and Value Creation (2012). Review of Finance, Vol. 16, No. 3, 2012, Available at SSRN: https://ssrn.com/abstract=1623660