Private Equity Managers Are More Honest Than You Think

Private equity funds tend to report their highest values around the same time that managers start fundraising – but research shows there could be an honest explanation.

Illustration by II

Illustration by II

If a private equity fund’s reported value peaks right when the general partner is raising a new fund, is it a lucky coincidence – or cause for suspicion?

An Indiana University business school professor suggests that the link between the two events is not coincidental, but not for the reasons you might think.

In a new academic paper, assistant finance professor Niklas Hüther analyzes the previously documented tendency of net-asset values to peak during fundraising periods, and whether that trend is the result of private equity managers exaggerating performance in order to lure investors. Although Hüther’s research confirmed that buyout fund portfolio values do, in fact, peak at a serendipitous time, analysis of the underlying buyout deals suggested that there is an explanation other than performance manipulation.

“In contrast to previous findings of a smoking gun at the fund level, I do not find any evidence of inflated performance at the deal level,” he wrote.

[II Deep Dive: MIT Study Finds Private Equity Managers Exaggerate Performance]


Hüther studied 121 U.S. buyout funds raised between 1996 and 2010, using proprietary data provided by “one of the largest international” limited partners in the world. He found that the observed peak in net-asset value stemmed from general partners making their best deals early in their funds’ lifecycle. Because these deals are made early on, the portfolio companies rise in value prior to the commencement of new fundraising, boosting the overall fund’s net-asset value.

In addition, Hüther found that private equity managers tend to make their worst deals right before fundraising. These portfolio companies eventually decline in value and drag the overall fund’s net-asset value down from its fundraising-period peak.

Hüther suggests that general partners make more bad deals right before raising a new fund because they are “pressured to invest unspent capital before fundraising.” He found that funds under pressure paid a premium for buyouts: Funds with worse reputations paid about 35 percent more for portfolio companies one year prior to fundraising, compared to funds with stronger reputations.

“This premium is in line with the approximately 35 percent drop in post-fundraising deal performance of low-reputation funds,” Hüther wrote. “Overall, the conjecture about manipulation is inconsistent with the deal-level evidence on fundraising.”