Analysis of the relationship between size and returns in private equity

• Main Author: Limal, Emmanuel (Emmanuel Arnaud Michel)
• Other Authors: Mark Kritzman.
• Format: Others
• Language: English
• Published: Massachusetts Institute of Technology 2015
• Subjects: Sloan School of Management.
• Online Access: http://hdl.handle.net/1721.1/99002

Thesis: S.M. in Management Research, Massachusetts Institute of Technology, Sloan School of Management, 2015. === Cataloged from PDF version of thesis. === Includes bibliographical references (pages 40-41). === We study in this paper the relationship between the size of funds and the related performance in the Private Equity industry. We show that for top quartile funds, an increase in size is associated with a decrease in performance. Furthermore, we show that this increase in fund size is also associated with an increase in performance of the lowest performing funds, leading to a less volatile spectrum of returns for larger fund sizes. Following this first analysis, we use System Dynamics techniques to visually represent the industry and hypothesize that these decrease in returns are led by manager's lack of focus, the increased competition for these deals and an increase in risk-taking. The main driver we identify as responsible for this increase in fund size over the past decade is due to the increase in management fees in absolute value. Finally, we discuss potential strategies enabling fund managers to balance this desire to increase management fees whilst protecting the high returns sought by Limited Partners investing in their funds. === by Emmanuel Limal. === S.M. in Management Research