Abstract

When investors commit capital to a private equity fund, the money is not immediately invested but is called by the fund manager throughout an investment period of up to five years. This business model allows private equity fund managers to invest the committed capital at their own discretion, which gives them the flexibility to time the markets. Based on 5,366 private equity deals, which are benchmarked against around 11,000 transaction market multiples and 170,000 trading market multiples, we find evidence that on average private equity funds are able to add value by timing the markets. Throughout the holding period, private equity funds achieve on average a 0.5 EBITDA market multiple expansion. Market timing ability is not captured by performance
measures such as the PME, yet it is a potential source of returns for investors.