Private Equity Firms ‘Try to Manipulate Their Performance’ When Raising Money

New research shows that private equity firms do this when they are under pressure to raise capital.

Illustration by II

Illustration by II

When private equity firms are under pressure to raise money, they’re more likely to manipulate their portfolio companies’ performance numbers, new research shows.

In the past, research has found that general partners tend to inflate net asset values during fundraising. Another recent study concluded that when fundraising is going poorly, private equity firms tend to hide bad news from limited partners. Now, new findings published on Monday show that no matter their reputation, private equity firms under pressure to raise capital “manipulate their numbers” to show strong performance.

“When prospective limited partners evaluate the performance of a PE firm’s latest funds, they have to rely on valuations reported by PE firms,” according to the paper, which was written by Ranko Jelic of the University of Sussex Business School, Dan Zhou from the University of Reading, and Wasim Ahmad from the University of Birmingham.

“The link between PE firms’ fundraising and performance evaluation is thus an area susceptible to manipulation resulting in potentially high stakes,” they added.

The group created a fundraising stress index, which aims to measure the level of pressure private equity investors are under. The index takes into account whether private equity firms are affiliated with banks and governments, which would mean they are better positioned to access large pools of capital. It also assumes that general partners will be under more fundraising pressure as they approach the end of their fundraising cycles, or if they have to frequently raise funds.

“Failure to raise new funds within a regular time period may lead to reputational damage and risk to a firm’s survival,” according to the paper. In other words, private equity firms are under a lot of pressure to ensure that a fundraising process goes well.


After creating the stress index, the researchers used data from the Thomson One database, private equity firms’ websites, the Perfect Information Navigation database, IPO prospectuses, the London Stock Exchange website, and the Zephyr database. They used data on the fundraising activities of 72 private equity firms between 1977 and 2017.

The researchers found that when private equity firms exhibited high fundraising stress index scores, they were more likely to engage in “upward earnings management” in portfolio companies. A one-unit increase in the stress index resulted in a 10 percent increase in discretionary working capital accruals.

Those discretionary working capital accruals are a method by which managers can adjust a company’s cash flows. According to the research, these “provide managers with opportunities to manipulate earnings.”

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The researchers found that a firm’s reputation — as measured by the Private Equity International ranking — did not have an effect on whether or not a firm engaged in this practice. However, the level of dry powder on hand does matter, but only in cases of extreme stress, the research showed.

The researchers did not return an email Tuesday seeking comment on their work.