Buy Low, Sell High? Do Private Equity Fund Managers Have Market Timing Abilities?

Abstract

When investors commit capital to a private equity fund, the money is not immediately invested but is called by the fund manager throughout an investment period of up to five years. This business model allows private equity fund managers to invest the committed capital at their own discretion, which gives them the flexibility to time the markets. Based on 5,209 private equity deals, which are benchmarked against 10,710 M&A transaction multiples, we find evi-dence that on average private equity funds are able to create value by timing the financial mar-kets. Market timing ability is not captured by performance measures such as the PME, yet it is a potential source of returns for investors.

Keywords: Private Equity, Mergers and Acquisitions, Value Creation, Market Timing

JEL Classification: G15, G20, G34