Wednesday, March 13, 2024

"Private Equity Performance Around the Globe"

This is a discussion of a paper in The Financial Analysts Journal by AlphaArchitect, March 11:


We construct a novel dataset to explore the returns of private equity in international markets (i.e., other than North America). We investigate fund performance and persistence and compare the findings to the extensive evidence on North American funds. We find that both investment strategy and investment geography characterize the performance and return persistence of private equity. Buyout funds have the highest returns in Europe, while growth equity funds perform better in Asia-Pacific. Venture capital returns are modest across all international geographies. As documented in the literature for North America, large capital inflows result in lower returns in Europe, while this does not affect other investment geographies. We also find evidence of important market segmentation and strong return persistence for buyout and growth funds in Europe, as well as for a sample of globally diversified, US-sponsored buyout funds. We do not find evidence of persistence in Asia-Pacific or other world locations. Our results are robust to different performance measures and various tests for selection effects. They also hold important implications for both fund managers and investors targeting international markets.

And the discussion:

What are the Research Questions?

By studying the fund-level cash flow data from Eurekahedge, the authors ask the following questions:

  1. What are the characteristics of fund returns in international private equity markets, particularly in regions outside of North America?
  2. How do fund performance and persistence vary across different investment geographies and fund investment styles?
  3. How do international private equity fund returns compare with those of North American funds, and what implications does this have for investors targeting international markets?
  4. How does capital inflow affect subsequent fund performance in different geographical regions?
  5. Are there any differences in the factors driving fund performance between North American private equity markets and those in Europe, Asia-Pacific, and other regions?

What are the Academic Insights?

The authors find:

  1. Buyout funds perform well in Europe, comparable to North American buyouts, with global buyout funds generally outperforming their North American-focused peers. Growth strategies excel in Asia-Pacific. Venture capital returns are highest for global funds but remain relatively low elsewhere, particularly below North American venture capital returns...