Measuring European limited partner performance in private equity and venture capital fund investments
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School of Business |
Master's thesis
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Date
2024
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Mcode
Degree programme
Finance
Language
en
Pages
88 + 3
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Abstract
We evaluate the performance of European limited partners’ (LPs’) private equity and venture capital investments over time. Using a sample of 12,086 investments made by 1,123 European institutional investors into buyout and venture funds raised between 1993 to 2016, we find significant heterogeneity in returns across different LP types. Over the 1993-2016 period, private pension funds and insurance companies, the highest-performing LP types in our sample, reported an average net IRR of 14.1%, while endowments, the lowest-performing LP type, reported an average net IRR of 11.3%. This 2.8 percentage point difference is economically significant. Additionally, we find that heterogeneity in returns across LP types has decreased over time, suggesting the maturation of the industry. When controlling for factors influencing LP returns in a multivariate model, our primary findings remain robust, though the performance ranking of LP types changes. Investment firms and bank/finance companies emerge as the top performers, achieving a net IRR that is 2.31 percentage points higher than the lowest-performing LP type, public pension funds, during the 1993-2016 period. To investigate the factors contributing to the heterogeneity in returns across LP types, we analyse LP types’ investment selection skills and their access to top-performing, access-restricting funds as potential explanations. First, we assess whether LP returns are driven by LP-specific attributes rather than random chance. Our bootstrap analysis indicates that more LPs consistently over- and underperform than what would be expected by chance, suggesting that LP-specific factors contribute to their returns. When examining reinvestment decisions and investments into first-time funds, we find no compelling evidence that differential investment selection skills across LP types explain the heterogeneity in returns. Interestingly, these analyses suggest that, on average, funds LPs choose to reinvest in generate lower returns than those they choose not to reinvest in. Additionally, our analyses indicate that differences in LP types' access to top performing, access-restricting funds do not explain the heterogeneity in returns across LP types. While private pension funds and investment firms are more likely to invest in these funds, our findings indicate that, on average, access-restricting funds underperform compared to their counterparts. These findings are puzzling since prior literature on U.S. LP types suggests that access to top-performing funds and investment selection skills contribute to the heterogeneity in returns across LP types. This raises the interesting follow-on question of what alternative explanations might account for the differences in private equity and venture capital returns across European LP types.Description
Thesis advisor
Nyberg, PeterKeywords
institutional investors, limited partners, private equity, venture capital, LP skill, fund access, return persistence