Local Overweighting and Underperformance: Evidence from Limited Partner Private Equity Investments

Abstract

Institutional investors exhibit substantial home-state bias in private equity. This effect is particularly pronounced for public pension fund investments in venture capital and real estate. Public pension funds achieve performance on in-state investments that is 2-4 percentage points lower than both their own similar out-of-state investments and similar investments in their state by out-of-state investors. States with political climates characterized by more self-dealing invest a larger share of their portfolio locally. Relative to the performance of the rest of the private equity universe, overweighting and underperformance in local investments reduce public pension fund resources by $1.2 billion per year.