Analysis of the relationship between size and returns in private equity

We study in this paper the relationship between the size of funds and the related performance in the Private Equity industry. We show that for top quartile funds, an increase in size is associated with a decrease in performance. Furthermore, we show that this increase in fund size is also associated with an increase in performance of the lowest performing funds, leading to a less volatile spectrum of returns for larger fund sizes. Following this first analysis, we use System Dynamics techniques to visually represent the industry and hypothesize that these decrease in returns are led by manager's lack of focus, the increased competition for these deals and an increase in risk-taking. The main driver we identify as responsible for this increase in fund size over the past decade is due to the increase in management fees in absolute value. Finally, we discuss potential strategies enabling fund managers to balance this desire to increase management fees whilst protecting the high returns sought by Limited Partners investing in their funds.

Department dc:contributor.department

Sloan School of Management.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2015

Author dc:creator

• Limal, Emmanuel (Emmanuel Arnaud Michel)

Advisor dc:contributor.advisor

• Mark Kritzman.

• Sloan School of Management.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/99002

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/99002