persistence

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.
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We use investment-level data to study performance persistence in venture capital (VC). Consistent with prior studies, we find that each additional initial public offering (IPO) among a VC firm’s first ten investments predicts as much as an 8% higher IPO rate on its subsequent investments, though this effect erodes with time. In exploring its sources, we document several additional facts: successful outcomes stem in large part from investing in the right places at the right times; VC firms do not persist in their ability to choose the right places and times to invest; but early success does lead to investing in later rounds and in larger syndicates.
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