What Drives Private Equity Returns?– Fund Inflows, Skilled GPs, and/or Risk?


The authors would like to thank the anonymous referee, Giorgio di Giorgio, Didier Guennoc, Dietmar Harhoff, Ulrich Hege, Donald Hester, Josh Lerner, Bernd Rudolph, Stefan Ruenzi; the participants of the 2004 EVI conference at Tuck Business School, Hanover (NH); the Finance and Economics Seminars at LUISS; the RICAFE Conference 2004, Frankfurt; the research workshop on ‘Managing Growth: The Role of Private Equity’ at IESE 2004, Barcelona; the ODEON-CEFS seminars in entrepreneurship and finance, Munich; the annual meetings of the German Finance Association 2005, Tübingen; the French Finance Association 2004, Paris; and the German Association of University Professors of Management 2005, Kiel, for many helpful comments. We are grateful to the European Venture Capital and Private Equity Association (EVCA) and Thomson Venture Economics for making the data used in this study available. The normal caveat applies.


This paper analyzes the determinants of returns generated by mature European private equity funds. It starts from the presumption that this asset class is characterized by illiquidity, stickiness, and segmentation. Given this presumption, Gompers and Lerner (2000) have shown that venture deal valuations are driven by overall fund inflows into the industry that yield the putative ‘money chasing deals’ phenomenon. It is the aim of this paper to show that this phenomenon explains a significant part of the variation in private equity funds' returns. This is especially true for venture funds, as they are affected more by illiquidity and segmentation than buy-out funds. In the context of a WLS-regression approach the paper reports a highly significant impact of total fund inflows on fund returns. It can also be shown that private equity funds' returns are driven by GP's skills as well as stand-alone investment risk. In a bootstrapping context we can show that most of these results are quite stable.