The Coller Institute of Private Equity presents descriptive evidence on the characteristics of a large sample of 3,847 US- based private equity advisors. They also study the factors associated with the commitments of pension funds and non-US investors to these advisors and the determinants of the overall performance of the advisors’ private equity funds. This report is the first to provide a comprehensive analysis of the universe of private equity advisors that have recently started to register with the SEC.
Evidence on commitments by pension funds and non-US investors
Pension funds that invest with larger advisors, for which private equity represents a smaller proportion of their overall assets under management, potentially achieve lower returns. Pension funds allocate
more capital to the more diversified (across asset classes) and very large private equity firms. This choice comes with a sacrifice in terms of performance as the private equity firms that invest a lower percentage of their total assets under management (AUM) in private equity achieve lower returns.
Pension funds that invest with advisors whose executives have weaker incentives or who have a lower proportion of investment professionals relative to AUM potentially achieve lower returns. We document that pension funds commit more capital to advisors with a lower alignment of interest with investors and those that have fewer investment professionals who manage a greater amount of AUM per capita. These advisor characteristics are associated with a lower return performance.
Non-US investors are now an important source of funding for US-based private equity firms and are sophisticated. Capital contributions by non-US investors range from 17% of AUM for the smallest private equity advisors with AUM below $100 million, to 29% of AUM for the largest advisors that manage over $5 billion in assets. Also, non- US investors seem to invest more with advisors that have characteristics associated with better performance (i.e., advisors which have a greater percentage of their AUM in private equity and where investment employees manage less AUM per capita).
Evidence on the performance of private equity advisors
- Specialization in private equity is associated with higher return performance. Advisors who invest a higher share of their capital under management in private equity obtain higher aggregate returns on their private equity funds. This finding suggests that specialization in private equity yields a better private equity performance, all else equal.
- A higher capital commitment by advisors to the private equity funds they manage correlates with better performance. Private equity advisors that contribute more of their own capital to the funds managed outperform their peers with the same vintage, geographical focus and investment strategy, consistent with the view that more “skin in the game” better aligns the incentives of the advisor with the investors.
- Smaller private equity firms have better incentive alignment. At smaller private equity advisors, the firm and the personal reputation are closely aligned, potentially explaining the often superior performance of smaller funds.
- Lack of compliance hurts performance. Reported violations of regulations or felonies are correlated with lower performance.
Housed within London Business School, the Coller Institute of Private Equity has as its primary focus the establishment of a world renowned research centre and debating forum on private equity. Casting a bridge between the academic and practitioner worlds, the Institute has no pre determined agenda or position. We are dedicated to the rigorous analysis and synthesis of data to establish and promote new insights and so facilitate a better understanding of the industry.
London Business School's Private Equity Institute started its work in 2004 under the stewardship of Professor Eli Talmor. Since then the Institute has become a global research centre and forum of debate regarding the Private Equity and Venture Capital subject matter.