Abstract:

Do returns in private equity (PE) rise or fall with fund scale? This question is increasingly urgent amid larger funds and new focus on the retail market. Since better managers can raise larger funds, the causal effect is difficult to identify. We develop an instrument based on gifts to universities, which lead to more capital for managers with preexisting relationships. We show decreasing returns; for example, a 1% size increase reduces net IRR by 0.1 percentage points. Larger funds do larger deals, which perform worse. We find no change in risk, in part because additional deals are more levered.

Authors:

Abhishek Bhardwaj, Tulane University, Freeman School of Business
Abhinav Gupta, UNC Kenan-Flagler Business School
Sabrina Howell, New York University, Stern School of Business
Kyle E. Zimmerschied, University of Missouri, Trulaske College of Business