In contrast to a number of recent studies, which examine the components of the gross returns generated by private equity funds at the deal level, this study focuses on returns at the fund level net of fees and carry. The researchers decompose the net returns of the private equity funds into four components (a) the portion driven by returns on the broad stock market (passive return), (b) the portion driven by investment timing and sector selection, (c) the effect of the buyout-typical leverage on funds' returns and (d) the residual intrinsic value, i.e. the private equity alpha. The results show an alpha of 4.47% (23% of the total return ) after accounting for the effect of leverage, investment timing and sector selection. This confirms the ability of private equity managers to create value and produce superior returns for their investors.
June 2010
