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 … Read more

Are Private Equity Returns Too Good to Be True?

Investments in private equity are typically structured as 10 year limited partnerships in which fund managers act as general partners (GPs) and investors act as limited partners (LPs). Since the fund life is broken down into an investment and a liquidation period, GPs can only make new investments after the investment period has expired by raising a new fund. At that time, existing investments are not necessarily liquidated, so that current fund returns rely heavily on subjective performance estimates of their investments. This fact, stemming from a market setting of information asymmetries, has led many investors, industry observers, and academics … Read more