Measuring Institutional Investors' Skill from Their Investments in Private Equity

Daniel R. Cavagnaro, Berk A. Sensoy, Yingdi Wang, Michael S. Weisbach

NBER Working Paper No. 22547
Issued in August 2016
NBER Program(s):Asset Pricing, Corporate Finance

Using a large sample of institutional investors’ private equity investments in venture and buyout funds, we estimate the extent to which investors’ skill affects returns from private equity investments. We first consider whether investors have differential skill by comparing the distribution of investors’ returns relative to the bootstrapped distribution that would occur if funds were randomly distributed across investors. We find that the variance of actual performance is higher than the bootstrapped distribution, suggesting that higher and lower skilled investors consistently outperform and underperform. We then use a Bayesian approach developed by Korteweg and Sorensen (2015) to estimate the incremental effect of skill on performance. The results imply that a one standard deviation increase in skill leads to about a three percentage point increase in returns, suggesting that variation in institutional investors’ skill is an important driver of their returns.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w22547

Users who downloaded this paper also downloaded* these:
Brown, Gredil, and Kaplan w22493 Do Private Equity Funds Manipulate Reported Returns?
Allen, Arkolakis, and Takahashi w20787 Universal Gravity
Ai and Bansal w22527 Risk Preferences and The Macro Announcement Premium
Nadauld, Sensoy, Vorkink, and Weisbach w22404 The Liquidity Cost of Private Equity Investments: Evidence from Secondary Market Transactions
Heckman, Lochner, and Todd w11544 Earnings Functions, Rates of Return and Treatment Effects: The Mincer Equation and Beyond
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us