One of the distinctive features of private equity as an asset class has been long-term persistence in the relative performance of private equity partnerships. Kaplan and Schoar (2005) for example, find correlations of nearly 0.5 between the returns of one fund and the next within a given private equity firm. Among venture capital (VC) funds, they report even higher levels of persistence, with correlations approaching 0.7. By contrast, persistence has been almost non-existent among asset managers operating in the public equity markets (Ferson, 2010; Wermers, 2011).
The most common interpretation of this persistence has been that private equity fund managers differ in their quality. Some managers, for example, may have a stronger ability to distinguish better investments from worse ones. Or, they may differ in the degrees to which they add value post-investment—for instance, by providing strategic advice to their portfolio companies or by helping them to recruit able executives.
But differences in performance could also stem from better access to deal flow. To gain greater insight into the sources of persistence, we shift the unit of analysis to the individual investment. Specifically, in our paper we examine how the performance of VC firms’ initial investments—in terms of having successful exits, either through IPOs or trade sales—are related to success that VC firms have with their subsequent investments.
