Factors determining the performance of private equity funds : a litterature review and an empirical study of the effects of industrial and geographical specialization

Abstract

The purpose of this report is to explore factors determining the performance of private equity (PE) funds. The first part of the report discusses performance measurement in the PE industry and reviews literature aiming at estimating the historical performance of PE as an asset class. Subsequently, literature on performance determinants in the PE industry is reviewed. The second part of this report is an empirical study based on a mixture of private placement memoranda, due diligence material and other information about 28 PE funds. These funds are described with respect to their general characteristics and investment strategy. Furthermore, the track records of the general partners raising the funds are described and compared to relevant benchmark information from Thomson Financial’s VentureXpert database. Based on the collected data, the effects of geographical and industrial specialization are investigated using univariate analyses and multiple regression. The results indicate that, for the venture capital funds, an exclusive focus on the Nordic region has yielded better performance than a less focused Nordic strategy. What is more, indications that venture funds benefit from specializing industrially is also found. However, simultaneous geographical and industrial specialization is found to have a negative effect. No significant effects of specialization are found in the buyout part of the sample.