Research

We assemble a proprietary dataset of 395 private equity (PE) fund prospectuses to analyze fund performance and fundraising success. We analyze both quantitative and qualitative information contained in these documents using econometric methods and machine learning techniques. PE fund performance is unrelated to quantitative information, such as prior performance, and measures of document readability. Measures of fundraising success, in contrast, are correlated to most fund characteristics but are not related to future performance. Meanwhile, machine learning tools can use qualitative information to predict future fund performance: the performance spread between the funds within the top and bottom terciles of predicted probability of success is about 25%. Our findings support the view that in opaque and non-standardized markets, investors fail to incorporate qualitative information in their asset manager selection process, but do incorporate salient quantitative information.

Using hand-collected data on the backgrounds of venture capitalists (VCs), we show that in a typical venture capital firm in our sample, 13.9% of VCs have been entrepreneurs before becoming a VC, referred to as entrepreneur VCs. Both OLS and 2SLS analyses suggest that venture capital firms employing a greater fraction of entrepreneur VCs have better performance. In addition, the positive effect of entrepreneur VCs on venture capital firm performance is stronger for smaller and younger venture capital firms, and venture capital firms specializing in high-tech industries and in early-stage investments. We further explore performance implications of VCs with prior experience in a finance-related field (i.e., Wall Street experience) and prior experience in a non-finance related field (i.e., Main Street experience). We find that contrary to prior experience in entrepreneurship, neither prior experience in Wall Street nor in Main Street is significantly related to venture capital firm performance. Finally, we provide evidence that entrepreneur VCs have greater individual performance in terms of VC rankings established by Forbes. Overall, our results are consistent with the idea that entrepreneur VCs have a better understanding of the business of starting and developing a new firm due to their first-hands experience, and play an important role in reducing the gaps in information and difference of opinions between an entrepreneur and the VCs backing the entrepreneur.

Analyzing a large sample of gross fund-level and deal-level returns in Private Equity (PE), we study systematic differences in investment skills across PE firms and what investors can learn about the true skill of PE firms from past performance. We extend the framework of Korteweg and Sorensen (2017) and establish a flexible variance decomposition model that estimates heterogeneity in returns, idiosyncratic risk-taking, and default risk. Our results show that investment skills are systematically different across PE firms with an estimated interquartile spread of returns ranging from 23% to 26% for deals and 17% to 21% for funds, relative to the market. Further, we find significant heterogeneity in idiosyncratic risk and default risk, but higher idiosyncratic variation does not explain higher expected returns. Since returns inherit substantial noise and spurious correlations from overlapping investments, investors require a considerable number of observations to learn about the true skill of PE firms.

This study investigates the effects of economic cycles on abnormal value creation of buyouts (BO) and on the investment activity of the corresponding Private Equity (PE) funds. We benchmark a large sample of BO transactions with closely matched public companies from 1986 to 2017. Our results show that BO transactions have created significantly more value overall, but abnormal value creation has disappeared in more recent periods. However, BO transactions are considerably less sensitive to adverse shocks in the real economy than their public counterparts. The adverse impact of a 1% increased exposure to economic distress is between 0.4% and 0.5% lower for BO than for public benchmarks. Using the quarterly cash-flow data of the corresponding PE funds, we find that investment activity of initial fund flows is slightly pro-cyclical, while reinvestment activity is highly countercyclical to the real economy. Our results imply that PE funds act as liquidity providers during economic distress by providing 45% to 49% more capital to their existing portfolio companies than in undistressed periods.

Over the past three decades, universities in industrialized countries have become increasingly active as venture capital financiers. Here, we analyze if investments in university-affiliated portfolio companies, in the form of an institutional-personal relation between the university and the founders, are a commercially successful investment proposition. We use a hand-collected data set of 706 university portfolio companies in the United States and the United Kingdom to extend previous case-based evidence that investments in faculty- and student-led start-ups are an elusive promise that rarely pays off commercially. Furthermore, we provide evidence that geographic proximity to a top venture capital ecosystem is a highly performance-relevant characteristic for university investors.

Understanding value creation at the transaction level is at the heart of explaining private equity (PE) returns. Taking advantage of a proprietary sample of 2,029 international buyout deals executed between 1984 and 2013 we provide detailed evidence on financial, market and operational value creation drivers. Additionally, we unravel the differences in value creation between regions, industries, transaction sizes and over time, providing limited and general partners with the opportunity to compare their past transactions with those of their respective peer groups.

This paper focuses on funds of funds (FOFs) as a form of financial intermediation in private equity (both buyout and venture capital). After accounting for fees, FOFs provide returns equal to or above public market indices for both buyout and venture capital. While FOFs focusing on buyouts outperform public markets, they underperform direct fund investment strategies in buyout. In contrast, the average performance of FOFs in venture capital is on a par with results from direct venture fund investing. This suggests that FOFs in venture capital (but not in buyouts) are able to identify and access superior performing funds.

An increasingly global venture capital (VC) business raises the question whether foreign VCs’ investments pull economic activity away from domestic economies. Using a large sample of VC-backed European ventures, we analyze whether involvement of foreign VCs influences firms’ and entrepreneurs’ migration patterns. We provide evidence that foreign investors, in particular from the U.S., on average, back much better European ventures and increase the likelihood of foreign exits and emigration of entrepreneurs. These effects are robust to endogenous selection. Our findings suggest that VC firms are a funnel through which high-impact economic actors are absorbed by countries with foreign VC presence. Governmental efforts to increase domestic supply of VC should have a positive impact on domestic economies.

In this paper we explore whether or not the experience as a founder of a venture capital-backed startup influences the performance of founders who become venture capitalists (VCs). We find that nearly 7% of VCs were previously founders of a venture-backed startup. Having a successful exit and being male and white increase the probability that a founder transitions into a venture capital career. Successful founder-VCs have investment success rates that are 6.5 percentage points higher than professional VCs while unsuccessful founder-VCs have investment success rates that are 4 percentage points lower than professional VCs. While successful founder-VCs do get higher quality deal flow than professional or unsuccessful founder-VCs, observably higher deal quality does not explain the entire difference in performance. Using an instrumental variables approach to separate unobservable deal quality from value-add, we find that the outperformance of successful founder-VCs is consistent with them adding more value post-investment.

There has been an increasing asymmetry between the rising interest in private companies and the limited availability of data. While a group of new commercial data providers has identified this gap as a promising business opportunity, and has started to provide structured information on private companies and their investors, little is known about the quality of the data they provide. In this paper, we compare detailed and verified proprietary information on 339 actual venture capital (VC) financing rounds from 396 investors in 108 different (mostly European) companies, with data included in eight frequently used VC databases to help academic scholars and investors better understand the coverage and quality of these datasets and, thus, interpret the results more accurately. We find that greater financing rounds are more likely to be reported than lower ones. Similarly, financing round sizes and post-money valuations are more likely to be reported for greater financing rounds than for lower ones. Our analysis reveals that VentureSource, Pitchbook and Crunchbase have the best coverage, and are the most accurate databases across our key dimensions of general company data, founders and funding information. We describe our findings in detail and discuss potential implications for researchers and practitioners.