Do Private Equity Managers Raise Funds on (Sur)real Returns?

The private equity industry has become the target of calls for more regulation, with critics and academics concerned that net asset values (NAVs) are inflated around periods of fundraising, particularly in the case of low-reputation funds. These calls are predicated on only one possible explanation for performance peaks at the time a new fund is raised: agency problems caused by strategic performance manipulation (see, e.g., Jenkinson, Sousa, and Stucke 2013, Barber and Yasuda 2017, Chakraborty and Ewens 2018, and Brown, Gredil, and Kaplan 2019).  Yet there is an alternative explanation. Private equity fund managers can use the heterogeneity in performance across funds as a way of allowing managers of imperfectly observed quality to showcase their ability. Low-reputation funds may have limited deal flow and thus take more time in identifying good deals. In turn, they potentially become forced buyers towards the impending start of raising a new fund.

The difficulty of singling out the actual explanation and finding an answer to the question of whether a private equity fund manager’s disclosure can be trusted in a market of severe information asymmetries is a data/empirical problem. While previous studies rely on aggregated portfolio data, I address this question by using a novel dataset on deal performance.

By analyzing valuations at the deal-level, I do not find any evidence of window dressing in private equity. The key factor for performance peaks lies in the deal composition rather than in inflated NAVs.

Why deal-level data matters to address window dressing

To understand the significance of individual portfolio company data, consider a fund with heterogeneous investment times. A peak of NAVs on the fund level, for instance, could be explained by inflated interim valuations of individual portfolio holdings. Alternatively, if deals made shortly before fundraising perform poorly so that their valuations after fundraising fall below their initial valuations at cost, these deals could reduce portfolio valuations after fundraising. If, in addition, deals made long before fundraising perform well, so that their initial valuations at cost increase around fundraising, the result would be a peak in aggregated values on the fund level just before a new fund is raised.

Understanding peak performance at fundraising times

To find out whether performance peaks are the result of deal composition or window dressing, I examined 2,451 fund-investment pairs of 121 buyout funds raised between 1996 and 2010.

My results show that only deals that are made shortly before fundraising have a significant drop in their returns after fundraising in funds with poor reputations that may anticipate problems in marketing a new fund. The fundraising valuation is around 35 percentage points higher in deals made less than a year prior to fundraising compared with cohort deals that did not raise a new fund that quarter. This difference is not absorbed by variation in the time deals are valued at cost or deal size. The fundraising valuation is not noticeably different across cohort deals that are made more than a year before the fundraising event.

What can explain the making of bad investments shortly before fundraising?

Good timing cannot be the answer, since the timing of bad investments should be random and also seen at the beginning of the fund life. A possible explanation is that particularly low-reputation funds are under more pressure to deploy dry powder closer to fundraising. If the current fund has a substantial amount of unspent capital close to the start of a new fund, fundraising for the new fund becomes more difficult. Low-reputation funds may lack the network among private equity firms or the deal flow and thus need more time in finding good investment opportunities compared with high-reputation funds, which puts them under investment pressure closer to fundraising. Indeed, I find strong evidence that low-reputation funds draw down the first 35 percent of their committed capital more slowly, while the next 35 percent of their capital is drawn down quicker compared with high-reputation funds.

I find that funds under pressure pay an approximate 35 percent premium for buyouts made shortly before fundraising. This premium is in line with the approximately 35 percent higher valuation of deals made less than one year ahead of fundraising as compared with non-fundraising cohort deals.


The common finding of previous studies is that fundraising for a new fund coincides with times of high current interim valuations, especially when costs of manipulation appear low. This finding is open to two different interpretations. One is that fund managers may advertise strong current fund performance by manipulating true estimates of current asset values, as suggested by prior work. Alternatively, managers may raise funds around true estimates of high current NAVs but undertake bad deals shortly before fundraising with increased pressure to deploy dry powder.

Instead of focusing on aggregated valuations on the fund level, my paper makes use of proprietary data on the portfolio company level of U.S. buyout funds. Results show that current fund peaks stem from strong early deals increasing in value well ahead of fundraising and weak later investments declining in value primarily after fundraising. I find no evidence of inflated valuations on the deal level.

The mechanism that appears to drive this result is that fund managers take more time to deploy dry powder at the beginning of their fund life and are pressured to invest unspent capital before fundraising. If this is the primary mechanism behind high interim valuations, then regulatory changes with respect to valuation methods in private equity that would seem superficially desirable for investors are not obviously better.


  1. Barber, B., and A. Yasuda, 2017, Interim Fund Performance and Fundraising in Private Equity, Journal of Financial Economics 124, 172-194.
  2. Brown, G., O. Gredil, and S. Kaplan, 2019, Do Private Equity Funds Manipulate Reported Returns?, Journal of Financial Economics 132, 267-297.
  3. Chakraborty, I., and M. Ewens, 2018, Managing Performance Signals Through Delay: Evidence From Venture Capital. Management Science 64, 2875-2900.
  4. Jenkinson, T., M. Sousa, and R. Stucke, 2013, How Fair Are The Valuations of Private Equity Funds?, Working Paper, Oxford University.

This post comes to us from Professor Niklas Huether at Indiana University’s Kelley School of Business. It  is based on his recent paper, “Do Private Equity Managers Raise Funds on (Sur)real Returns? Evidence from Deal-Level Data,” available here.