Contributors of return in a private equity context - in search of the "prevailing winds

This paper analyzes the potential determinants of internal rates of return generated by US private equity funds. It uses a dataset of individual fund returns collected by Thomson Financial on the US venture capital and buyout capital (the “Private Equity”) sectors for the periods from 1980 to 2005. It is the aim of this paper to document potential factors that serve as “prevailing winds” within the private equity sector. We build on work completed by Gompers and Lerner (2000), Cumming and Walz (2004), as well Kaserer and Diller (2004) in identifying and measuring the potential impact of certain economic factors on the private equity industry’s internal rates of return (IRR). The research looks beyond the traditional reliance on ‘manager skill’, in an effort to develop insights that are supportive to General Partners and their Limited Partners. The paper presents OLS-regression and WLS-regression models that are able to explain the variation in private equity returns. The results presented are for use by private equity fund managers as well as their institutional investors in helping better understand the impact certain macroeconomic factors can have on their potential investment returns.