Private equity returns, cash flow timing, and investor choices Stephannie Larocque,∗ Sophie Shivey and Jennifer Sustersic Stevenszx August 22, 2019 Abstract In a comprehensive sample, private equity fund lifetimes average 10 years but their cash flow durations average 4 years with substantial variation across funds. This creates cash management challenges for investors and makes the internal rate of return (IRR) an incomplete measure of performance. Do investors consider these facts when choosing between funds? We find that the portion of IRR that stems from cash flow timing - more than half the IRR on average - persists across a private equity firm’s funds and negatively predicts future performance, but facilitates fundraising, especially among insurance companies, endowment plans, and public pension funds, as well as relatively unsuccessful investors. ∗Mendoza College of Business, University of Notre Dame,
[email protected]. yCorresponding author. Mendoza College of Business, University of Notre Dame,
[email protected]. zOhio University College of Business,
[email protected]. xWe thank Marc Crummenerl, John Donovan, Steve Foerster, William Goetzmann, Tim Jenkinson, Tim Loughran, Ernst Maug, Ludovic Phalippou, Stefan Ruenzi, Paul Schultz, Yannik Schneider, Sara Ain Tommar, Florin Vasvari, Michael Weisbach, conference participants at the Paris Dauphine 11th Annual Hedge Fund and Private Equity Conference and the Glion Annual Private Capital Conference and seminar participants at the University of Frankfurt, the University of Mannheim, the University of Notre Dame, Ohio University, and York University for helpful comments. We also thank George Jiang and Xue Li for excellent research assistance. We have seen a number of proposals from private equity funds where the returns are really not calculated in a manner that I would regard as honest ..