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Giants at the Gate: Investment Returns and Diseconomies of Scale in Private Equity

Published online by Cambridge University Press:  12 August 2015

Florencio Lopez-de-Silanes ,
Ludovic Phalippou  and
Oliver Gottschalg
Florencio Lopez-de-Silanes*
Affiliation:
[email protected], EDHEC Business School, Nice 06202, France and National Bureau of Economic Research
Ludovic Phalippou
Affiliation:
[email protected], University of Oxford, Said Business School, Oxford OX1 1HP, United Kingdom
Oliver Gottschalg
Affiliation:
[email protected], HEC Paris (Groupe HEC), Strategy and Business Policy, Jouy-en-Josas Cedex 78351, France.
*
*Corresponding author: [email protected]
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Abstract

We document the wide dispersion of private equity investment returns and examine performance determinants using a newly constructed database of 7,500 investments worldwide. One in 10 investments does not return any money, whereas 1 in 4 has an internal rate of return (IRR) above 50%. Quick flips are associated with the highest returns. Performance does not appear scalable: Investments held by private equity firms in periods with a high number of simultaneous investments underperform substantially. Results are consistent with the theoretical literature on organizational diseconomies linked to firm structure. Private equity firms’ actions do not appear to be mechanical or easily scalable.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 3 , June 2015 , pp. 377 - 411
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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