Raising Funds on Performance: Are Private Equity Returns Too Good to be True?

This paper uses a novel observable benchmark for reports of estimated unrealized private equity fund performance to analyze empirically whether agency problems impact reported returns. I document that private equity funds do not only hold private deals but that they also hold shares in publicly traded stocks, in which they take an activist role. These stock investments provide observable performance throughout the fund life in contrast to prices of endogenous portfolio company exits. I apply this novel benchmark of private equity performance to explain reported performance run-ups when managers advertise a new private equity fund. Using quarterly cash flow and valuation data on 2,776 portfolio company investments by 138 U.S. buyout funds, I find in contrast to industry perception that fund managers time fundraising with strong current fund performance instead of manipulating interim performance estimates.