Starting up and Growing New Businesses
Edited by Bart Clarysse, Juan Roure and Tom Schamp
Chapter 4: The Impact of Capital Inflows and Management Skills on the Performance of European Private Equity Funds
4. The impact of capital inﬂows and management skills on the performance of European private equity funds Christoph Kaserer and Christian Diller 1. INTRODUCTION In this chapter we address two important topics concerning the performance of European private equity funds. First, we discuss brieﬂy how the performance of a private equity fund should be measured. On that basis we oﬀer some performance data for mature European private equity funds. Second, we raise the question what factors have an impact on these returns. In this regard we put special emphasis on two speciﬁc issues, known in the literature as the persistence and money-chasing-deals phenomena. In this chapter we present strong evidence in favour of the existence of both of these phenomena, which has important consequences for investors allocating a part of their wealth under management towards the private equity industry. It is well known that there are many diﬀerent ways to measure returns of private equity funds. First, the industry itself mostly relies on an internal rate of return approach (IRR) or, even simpler, on a multiple approach. An important argument against using the IRR as a return measure relates to the fact that it is assumed that the opportunity cost of capital invested in the fund is equal to the IRR. As the investment opportunities of a private equity fund may be rather singular, this makes little sense. Moreover, in this way any comparison with other asset classes is subject to distortion. Due to these...
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