The Returns of Private Equity - Skills or Pure Luck?

Abstract: This thesis investigates if, and in that case to what extent, the fund manager’s skills affect return of private equity funds. A regression analysis based on performance data of private and public equity is undertaken and used to determine the value added through skills provided by fund managers. The results indicate that skills do in fact affect returns in private equity with up to 10% annually. In addition, the results show that venture capital funds are more closely linked to the performance of the stock market, whereas buyout funds are more affected by the manager’s skills. An important practical implication arising from this study is the suggestion that practitioners take skills into account when evaluating the return prospects of various funds. By doing so, investors can more easily distinguish between winning and losing funds. This study contributes to a greater understanding of what drives returns, but also tries to fill the knowledge gap on how skills play a driving role.