The ‘Home Bias’ in Private Equity Pays Off

“LPs with local overweighting realize superior investment returns,” researchers found.

Billy H.C. Kwok/Bloomberg

Billy H.C. Kwok/Bloomberg

Investors have a home bias when it comes to selecting private equity funds, according to research from Switzerland’s University of St. Gallen.

“The home bias in local fund manager selection holds across investor types, fund characteristics as well as market regions,” St. Gallen researchers Stefan Morkoetter and Tobias Schori said in a working paper this month. Their research found that limited partners overweigh their investments with private equity managers based in the same region by 45 percent on average.

Favoring local fund managers pays off for investors, or the so-called limited partners referred to in the private equity industry as LPs, according to the paper. That’s because they benefit from “information advantages and better fund access” in their home market, the authors suggested.

“Investments committed with locally domiciled fund managers are not only being overweighed, but also perform better than investments with fund managers domiciled in foreign market regions,” wrote Morkoetter and Schori. “LPs have superior skills in selecting high-performing GPs in their local market region,” they explained, and “inferior skills” when picking general partners that are foreign domiciled.

General partners, or GPs, are the managers of private equity funds. The LPs in the study included public and corporate pension funds, endowments, insurance companies, banks, and government-linked investors, the paper shows.

The authors evaluated 114,098 investments committed by 12,258 limited partners into 20,473 private equity funds. Their research spanned five market regions — North America, developed Europe, developed Asia-Pacific, emerging Asia-Pacific, and the rest of world — between 1969 and 2020.


“Over the last decades, the PE industry has grown from an asset class that was dominated by U.S.-based fund managers to a global market and every major market region nowadays comprises a large, diversified fund manager base,” the authors said. Finding that local overweighting leads to stronger returns, they said “LPs who consider investing outside of their local market should thus closely monitor investment patterns of their local peers.”

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Limited partners based in emerging Asia-Pacific have the highest home bias, with a 68 percent overweighting of local private equity funds, according to the paper. LPs domiciled in developed Europe have the lowest overweighting, with excess home investments of 24 percent.

The study found that investments with local GPs are associated with “a positive excess” internal rate of return of 0.73 percent. By contrast, allocations to foreign domiciled managers resulted in a “negative excess IRR” of 0.10 percent, according to the paper.

“LPs with local overweighting realize superior investment returns,” the authors said.