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Smart Institutions, Foolish Choices: The Limited Partner Performance Puzzle





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    • Josh Lerner is at Harvard University and National Bureau of Economic Research. Antoinette Schoar is at Massachusetts Institute of Technology, CEPR and NBER. Wan Wongsunwai is at Harvard University. We thank Nick Lau and Brian Zingale for research assistance. Paul Gompers, John Hand, Thomas Hellmann, Dirk Jenter, Steven Kaplan, Per Stromberg, and numerous practitioners provided helpful comments. We also thank seminar participants at Harvard University, London Business School, the University of North Carolina, and the University of Wisconsin for many helpful comments. Harvard Business School's Division of Research provided financial support. All errors are our own.


The returns that institutional investors realize from private equity differ dramatically across institutions. Using detailed, hitherto unexplored records, we document large heterogeneity in the performance of investor classes: endowments' annual returns are nearly 21% greater than average. Analysis of reinvestment decisions suggests that endowments (and to a lesser extent, public pensions) are better than other investors at predicting whether follow-on funds will have high returns. The results are not primarily due to endowments' greater access to established funds, since they also hold for young or undersubscribed funds. Our results suggest that investors vary in their sophistication and potentially their investment objectives.