Abstract
Institutional investors often select private equity real estate (PERE) funds based on the belief that some of the managers possess skill. In this paper, we study skill of PERE general partners (GPs) from two perspectives: performance persistence and limited partner (LP) reinvestment. We first risk-adjust fund returns by controlling for fund characteristics and obtain abnormal returns that are driven by managerial skill. We then use pooled OLS and probit regressions on abnormal returns to show that managerial performance persists in our sample, and that skilled managers continue to deliver winning risk-adjusted performance, while for mediocre managers performance does not persist in terms of neither performance correlation nor probability of repeating performance. We also provide evidence that LP reinvestment can serve as a signal of skill, as reinvested funds perform better than non-reinvested ones. This positive effect of reinvestment also applies to the predecessor loser and non-winner funds, suggesting that poor performance does not always indicate the lack of skill, but can be a result of random events.
Highlights
Main investors in private equity real estate (PERE) funds are institutional investors such as pension funds and insurance companies
2 it has been shown that not all the limited partner (LP) are sophisticated in a sense of their capacity to learn about general partners (GPs) skill (Lerner et al 2007; Cavagnaro et al 2019), and some reinvested funds could be the funds of unskilled managers, further in the paper we show that in our sample reinvested funds are more likely to perform better than non-reinvested ones in terms of both risk-adjusted and raw returns, signifying that the presumption about the link between LP reinvestment and GP skill holds in our sample
Based on regression results presented in Panel A, we find correlation between abnormal returns of focal and previous, focal and second previous and focal and average previous fund performance
Summary
Main investors in private equity real estate (PERE) funds are institutional investors such as pension funds and insurance companies. With money of their beneficiaries at stake, high variability of PERE returns coupled with a low liquidity of PERE investments, makes picking the “right” fund increasingly important. Fund selection is complicated by the opaqueness of the asset class, which leaves investors with relatively little information about potential investments. Investors believe in performance persistence i.e. that performance of successive funds by the same GP is correlated
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