Illuminating the Performance of Private Equity – An Essay Collection

This dissertation consists of three research projects that shed light on the performance of private equity (PE).
The first study provides evidence highlighting that transaction types substantially differ with respect to their return, risk, and value creation profiles. In particular, it is demonstrated that acquired divisions lead to the highest returns for PE firms. On the other hand, companies sold by financial investors generate lower and companies sold by private individuals even markedly lower investor returns. Further analyses show that the variation in investor returns is not driven by underlying differences in risk but rather by different value creation profiles across deal types.
The second study analyzes PE funds’ use of credit facilities to defer capital calls from their investors. In essence, simulation results indicate that standard credit facilities constitute a convenient cash flow management tool, whereas more extended credit facilities can notably change time-sensitive performance measures and fund rankings. Consequently, extended credit facilities could distort the fundraising of PE firms if investors fail to understand their effects.
The third study evaluates the skills of PE firms by quantifying the level of long-term persistence in deal-level performance. On this basis, it is demonstrated that PE firms from the top quartile are substantially more skilled than their peers from the bottom quartile. Although statistical models can only explain a small portion of the total variation in PE performance, simulations suggest that investors can rank PE firms with increasing accuracy as more deal returns become observable. In this context, the simulations show that investor learning about the skills of PE firms is greatest for the first observed deal returns and that PE firms from the top and bottom quartiles can be more rapidly identified.