Do Private Equity Funds Manipulate Reported Returns?
Private equity funds hold assets that are hard to value. Managers may have an incentive to distort reported valuations if these are used by investors to decide on commitments to subsequent funds managed by the same firm. Using a large dataset of buyout and venture funds, we test for the presence of reported return manipulation. We find evidence that some under-performing managers boost reported returns during times when fundraising takes place. However, those managers are unlikely to raise a next fund, suggesting that investors see through much of the manipulation. In contrast, we find that top-performing funds likely understate their valuations.
Helpful comments and suggestions provided by James Bachman, Diego Garcia, Tim Jenkinson, Bob Harris, James Kocis, Anna Kovner, Ludovic Phalippou, Kelvin Law, Minjie Zhang and seminar participants at the 2012 Global Private Investing Conference, the 2013 Meeting of the European Finance Association, Berkeley-Haas Fraud and Misconduct Conference, the 2014 Meeting of the American Finance Association, the 2014 Meeting of Financial Intermediation Research Society, and the 2014 Vanderbilt Private Equity and Venture Capital Conference. We thank Burgiss and especially Brandon Renkart and Wendy Hu for providing research support. This research has benefited from the support of the Private Equity Research Consortium (PERC) and the UAI Foundation. Kaplan has consulted to buyout and venture fund general partners and limited partners. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Steven N. Kaplan
Kaplan has consulted to venture fund general partners and limited partners.
- Underperformers may overstate interim returns, while high performers may be conservative in valuing their unrealized investment...
Gregory W. Brown & Oleg R. Gredil & Steven N. Kaplan, 2018. "Do private equity funds manipulate reported returns?," Journal of Financial Economics, . citation courtesy of