TY  - JOUR
AU  - Hochberg,Yael V.
AU  - Rauh,Joshua D.
TI  - Local Overweighting and Underperformance: Evidence from Limited Partner Private Equity Investments
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17122
PY  - 2011
Y2  - June 2011
UR  - http://www.nber.org/papers/w17122
L1  - http://www.nber.org/papers/w17122.pdf
N1  - Author contact info:
Yael Hochberg
Kellogg School of Management
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/467-4574
Fax: 847/491-5719
E-Mail: y-hochberg@kellogg.northwestern.edu

Joshua Rauh
Stanford Graduate School of Business
Stanford University
Knight Management Center
655 Knight Way
Stanford, CA 94305-7298
Tel: 650-723-9898
Fax: 650-725-6152
E-Mail: Rauh_Joshua@gsb.stanford.edu
AB  - Institutional investors of all types exhibit substantial home-state bias when investing in private equity (PE) funds. This effect is particularly pronounced for public pension funds, where the local overweighting amounts to 9.7% of the private equity portfolio on average, based on 5-year rolling average benchmarks. Public pension funds’ own-state investments perform significantly worse than their out-of-state investments, an average of 3-4 percentage points of net IRR per year, and those that that overweight their portfolios towards home-state investments also perform worse overall. These underperformance patterns are not evident for other types of institutional investors, such as endowments, foundations and corporate pension funds, and we do not observe similar overweighting or underperformance of investments in neighboring states. Overweighting in home state investments by public pension funds is greater in states with higher levels of corruption, although there is no positive correlation of underperformance with corruption for these investors. The overweighting and underperformance of local investments cost public pension funds between $0.9 and $1.2 billion per year, depending on the benchmark.
ER  -