Working Paper: NBER ID: w22547
Authors: Daniel R. Cavagnaro; Berk A. Sensoy; Yingdi Wang; Michael S. Weisbach
Abstract: Using a large sample of institutional investors’ private equity investments in venture and buyout funds, we estimate the extent to which investors’ skill affects returns from private equity investments. We first consider whether investors have differential skill by comparing the distribution of investors’ returns relative to the bootstrapped distribution that would occur if funds were randomly distributed across investors. We find that the variance of actual performance is higher than the bootstrapped distribution, suggesting that higher and lower skilled investors consistently outperform and underperform. We then use a Bayesian approach developed by Korteweg and Sorensen (2015) to estimate the incremental effect of skill on performance. The results imply that a one standard deviation increase in skill leads to about a three percentage point increase in returns, suggesting that variation in institutional investors’ skill is an important driver of their returns.
Keywords: Institutional Investors; Private Equity; Skill Measurement; Returns
JEL Codes: G11; G23; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Institutional investor's skill (G23) | Returns from private equity investments (G12) |
| One standard deviation increase in skill (J24) | Approximate three percentage point increase in internal rates of return (IRR) (G19) |
| One standard deviation increase in skill (J24) | Five percentage point increase in returns for venture capital investments (G11) |
| Higher skill (J24) | Better performance (D29) |
| Higher variance in actual performance (D29) | Skill rather than luck plays a significant role in investment outcomes (G11) |