Communicating Performance: Textual and Financial Disclosures in Private Equity

Private capital fund managers appear to possess significant information about the relative quality of their portfolio firms even within the first three years after the investment. But the way this information is disclosed to investors changes dynamically: Textual discussions of portfolio companies have substantial information about the firms’ ultimate performance in the early stages of investment, while interim valuations are less important. Over time, this pattern reverses, with interim valuations becoming more important in explaining future returns, especially after portfolio companies have a financing event. The results vary not only with the tone but also with the content of fund manager disclosures. In an opaque market with substantial information asymmetries, textual discussions seem to serve as a signal about general partner quality.