In our recent NBER working paper, Private Equity Performance: What Do We Know?, my co-authors (Tim Jenkinson of the University of Oxford and Robert Harris of the University of Virginia) and I use a new research-quality data set of private equity fund-level cash flows from Burgiss. We refer to private equity as the asset class that includes buyout funds and venture capital (VC) funds. We analyze the two types of funds separately. The data set has a number of attractive features that we describe in detail later. A key attribute is that the data are derived entirely from institutional investors (the limited partners or LPs) for whom Burgiss’ systems provide recordkeeping and performance monitoring services. This results in detailed, verified and crosschecked investment histories for nearly 1400 private equity funds derived from the holdings of over 200 institutional investors. Using these data we reassess the performance of private equity funds, in absolute terms and relative to public markets. Our results are markedly more positive for buyout funds than have previously been documented.
To shed new light on private equity performance and on the data issues that have hindered private equity research, we use data from four commercial sources to study U.S buyout and venture capital funds. Our most detailed analyses take advantage of Burgiss data on fund-level cash flows. In tandem, we use summary level data from the other leading commercial sources – Preqin, Cambridge Associates (CA) and Venture Economics (VE). We also compare our results to vintage year performance taken from Kaplan and Schoar (2005) and Robinson and Sensoy (2011), both of which use underlying cash flow data for funds. Kaplan and Schoar study VE data. Robinson and Sensoy use data from a single large LP who, they argue, invested very much like an index fund, particularly for buyout funds. By comparing results across datasets with very different selection criteria and methods of gathering information, we are able to draw stronger conclusions. Moreover, since our data allow us to examine more recent vintage years than covered in prior research, we can compare performance across different time periods, including parts of the last decade when private equity fund raising increased dramatically.
Using Burgiss cash flow data, we find that average U.S. buyout fund returns have exceeded those of public markets for most vintages since 1984. The outperformance versus the S&P 500 averages 20% to 27% over the life of the fund and more than 3% per year. These results are consistent with and supported by those in Robinson and Sensoy (2011). Average venture capital fund returns in the U.S., on the other hand, outperformed public equities in the 1990s, but have underperformed public equities in the most recent decade. We do not find any evidence that our conclusions for buyout funds or venture capital funds are affected by different assumptions of systematic risk.
Again harnessing fund-level cash flows from Burgiss, we study the relationship between market-adjusted performance (PMEs) and absolute performance (internal rates of return (IRRs) and investment multiples). We find that within a given vintage year, PMEs are reliably predicted by a fund’s multiple of invested capital and IRR. Regression results show that multiples and IRRs explain atleast 93% of the variation in PMEs in more than 90% of vintage years. Although both add explanatory power, the multiple of invested capital provides more explanatory power than the IRR overall and in most vintage years. This suggests to us that multiples of invested capital should be preferred to IRRs as summary measures of private equity performance.
Using these strong statistical patterns, we are then able to estimate the market-adjusted average performance in the other commercial databases. We apply the regression coefficients to the vintage year IRRs and investment multiples from VE, Preqin, and CA to estimate vintage year PMEs for the funds in those databases. This procedure only requires the vintage year IRRs and multiples from the other databases, even if the underlying fund cash flows are not available to us or, even, to the commercial source (as is likely the case for some of the Preqin data).
As with the Burgiss data, we find that buyout funds outperform public markets in the 1990s and 2000s in the three other commercial databases. We estimate that the funds in Preqin and CA, like those in Burgiss, all outperform the S&P 500 in the average vintage year by at least 20% over the life of the fund. Although the PMEs are lower in the (likely downwardly biased) VE database, the VE PMEs still imply that the average private equity fund outperformed the S&P 500 by more than 10% over the life of the fund. For VC funds, the PME results are generally consistent across all four databases although, again, lower in the VE data.
Our results suggest that it is highly likely that the VE returns, upon which a number of academic papers have relied, understate buyout and, possibly, VC fund performance. Furthermore, the consistency of the returns from Burgiss, Preqin and CA despite very different sample selection criteria suggests that they likely represent reliable measures of average buyout and VC fund performance.
Overall, our findings strongly suggest that buyout funds have outperformed the public equity markets over most of our sample period. To invalidate that conclusion, all three reliable commercial datasets would have to be subject to a similar and large positive selection bias despite very different data collection and reporting methods. We view this as very unlikely.
We also examine whether fund performance is linked to the aggregate amount of capital flowing into private equity or to the size of a fund. We find that both absolute performance and performance relative to public markets are negatively related to aggregate capital commitments for both buyout and VC funds. This is consistent with and extends the results in Kaplan and Stromberg (2009). These results differ from those in Robinson and Sensoy (2011) who do not find that buyout funds PMEs are negatively related to capital commitments. We find no significant relation between performance and fund size for buyout funds. For VC funds, we find that funds in the bottom quartile of fund size underperform. Controlling for vintage year, top size quartile funds have the best performance although it does not differ significantly from funds in the 2nd and 3rd size quartiles.
The full paper is available for download here.