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Robert Marquez, Vikram Nanda, M. Deniz Yavuz, Private Equity Fund Returns and Performance Persistence, Review of Finance, Volume 19, Issue 5, August 2015, Pages 1783–1823, https://doi.org/10.1093/rof/rfu045
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Abstract
Successful private equity managers have funds that are often oversubscribed and provide persistent abnormal returns. Why do not successful managers increase fund size or fees? We argue that managers want to attract high-quality entrepreneurs, while entrepreneurs want to match with high-ability managers. However, observing fund performance does not allow entrepreneurs to distinguish a manager’s ability from the quality of firms in the fund’s portfolio. As a consequence, a fund manager may devote unobserved effort to select firms, and keep fund size small to limit the cost of effort, hoping to manipulate entrepreneurs’ beliefs about his ability.