Cyclicality, Performance Measurement, and Cash Flow Liquidity in Private Equity
Public and private equity waves move together. Using quarterly cash-flow data for a large sample of venture capital and buyout funds from 1984-2010, we investigate the implications of this co-cyclicality for understanding private equity cash flows and performance. In the cross-section, varying the beta used to assess relative performance has a large effect on inference near a beta of zero, but only a modest effect for more reasonable beta estimates. A similar message comes through in the time series. Though funds raised in hot markets underperform in absolute terms, this underperformance is sharply reduced by a comparison to the S&P 500, and disappears entirely at the levels of beta recently estimated in the literature. These findings imply that high private equity fundraising forecasts both low private equity cash flows and low market returns, suggesting a positive correlation between private equity net cash flows and public equity valuations. Examining cash flows directly, we find that this is indeed the case. While both capital calls and distributions rise with public equity valuations, distributions are more sensitive than calls. Net cash flows are therefore procyclical and private equity funds are liquidity providers (sinks) when market valuations are high (low). Venture cash flows and performance are considerably more procyclical than buyout. Debt market conditions also have a significant impact on private equity cash flows. At the same time, most cash-flow variation is idiosyncratic across funds, and most predictable variation is explained by the age of the fund.
We thank Harry DeAngelo, Tim Jenkinson, Steve Kaplan, Josh Lerner, Andrew Metrick, Oguzhan Ozbas, Ludovic Phalippou, Antoinette Schoar, Morten Sørensen, Per Strömberg, René Stulz, Mike Weisbach, and seminar and conference participants at Baylor University, Erasmus University Rotterdam, London School of Economics, Tilburg University, UCSD, the EFA 2011 Annual Meeting, the NBER Entrepreneurship Summer Institute, and the third annual LBS Private Equity Symposium for helpful comments and discussions. This paper, along with a companion paper, supersedes a previous draft entitled "Private Equity in the 21st Century: Cash Flows, Performance and Contract terms from 1984-2010." The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
David T. Robinson & Berk A. Sensoy, 2016. "Cyclicality, performance measurement, and cash flow liquidity in private equity," Journal of Financial Economics, vol 122(3), pages 521-543.