Investors in Private Equity Funds: Large-Scale Performance Analysis and the Question if Location Matters

Abstract

I ask if different types of institutional investors, e.g. pension funds, insurances or endowments etc., differ in their performances when investing in private equity (PE) funds. To approach this question, I use a new data set that includes more than 12,343 global investment observations in PE funds, from 1991 until 2003, to analyze returns by nine separate investor types. First, I show that investor types differ markedly in their returns from individual PE fund types. For instance, endowments seem particularly well equipped to invest in VC funds, while large institutional investors, particularly insurances and banks, appear to be better at investing in buyout funds. However, when analyzed over longer time periods and including the entire private equity fund type family, differences in returns by investor type converge to the average, as differences by fund type fluctuate over time. I also document that this decade, lack of investor experience was probably no longer an impediment to PE investment success. This suggests that even inexperienced investors had access to successful, ever larger buyout funds seen over the last few years. In addition, I find some, albeit limited return differences for investors in different global regions, be it in the USA, Europe or the rest of the world. Second, I probe an interesting hypothesis with regard to the success of LPs in their VC investments: The LP proximity hypothesis. I find evidence that LP proximity matters significantly and that there are presumably geographically confined knowledge spill-overs that also affect LP investments. Specifically, I document that public pension funds that were geographically close to the most successful VC firms of the nineties enjoyed significantly higher returns than their peers located farther away, in other cities or states.