Smart Institutions, Foolish Choices: The Limited Partner Performance Puzzle

The returns that institutional investors realize from private equity investments differ dramatically across institutions. Using detailed and hitherto unexplored records of fund investors and performance, we document large heterogeneity in the performance of different classes of limited partners. In particular, endowments annual returns are nearly 21% greater than average. Funds selected by banks lag sharply. Analysis of reinvestment decisions suggests that endowments (and to a lesser extent, public pension funds) are better than other investors at predicting whether a follow-on fund will have high returns. We find that the results are not primarily due to endowments greater access to established funds, since they also hold for young or under-subscribed funds. Our results suggest that limited partners vary in their level of sophistication and also their objectives.