【正文】 luntary reporting of fund returns by the private equity firms (or general partners (GPs)) as well as their limited partners (LPs). We study three issues with this data set that have not been closely examined before.First, we investigate the performance of private equity funds. On average, LBO fund returns net of fees are slightly less than those of the Samp。P 500。 VC? Kaplan is at the University of Chicago Graduate School of Business and at the NBER。 Schoar is at the Sloan School of Management at MIT, and at the NBER, and the CEPR. We thank Ken Morse at the MIT Entrepreneurship Center and Jesse Reyes from Venture Economics for making this project possible. We thank Eugene Fama, Laura Field Josh Lerner, Alexander Ljungqvist, Jun Pan, Matt Richardson, Rex Sinquefield, Rob Stambaugh (the editor), Rebecca Zarutskie, an anonymous referee, and seminar participants at Alberta, Arizona State, Chicago, MIT, NBER Corporate Finance, NYSEStanford Conference on Entrepreneurial Finance and IPOs, NYU, and USC for helpful ments. Data for this project were obtained from the VentureExpert database collected by Venture Economics.1 We thank Jesse Reyes from VE for making the data available.1791 1792 The Journal of Financefund returns are lower than the Samp。P 500 on an equalweighted basis, but higher than the Samp。P 500 on a capital weighted These results bined with previous evidence on private equity fees, however, suggest that on average, both types of private equity returns exceed those of the Samp。P 500 gross of fees. We also find large heterogeneity in returns across funds and time.Second, we document substantial persistence in LBO and VC fund performance. General partners (GPs) whose funds outperform the industry in one fund are likely to outperform the industry in the next and vice versa. We find persistence not only between two consecutive funds, but also between the current fund and the second previous fund. These findings are markedly different from the results for mutual funds, where persistence has been difficult to detect and, when detected, tends to be driven by persistent underperformance rather than We investigate whether selection biases, risk differences, or industry differences can explain the results and conclude that they are unlikely to do so.Third, we study the relation of fund performance to capital flows, fund size, and overall GP survival. We analyze the relation of a fund’s track record to capital flows into individual GPs and the industry overall. Fund flows are positively related to past performance. In contrast to the convex relationship in the mutual fund industry, however, the relationship is concave in private equity (see Chevalier and Ellison (1997), Sirri and Tufano (1998), and Chen et al. (2003)). Similarly, new partnerships are more likely to be started in periods after the industry has performed especially well. But funds and partnerships that are raised in boom times are less likely to raise followon funds suggesting that these funds perform poorly. A larger fraction of fund flows during these times, therefore, appears to go to funds that have lower performance, rather than top funds. Finally, the dilution of overall industry performance in periods when many new funds enter is mainly driven by the poor performance of new entrants. The performance of established funds is less affected.In the last section of this paper, we discuss possible explanations for our findings. Underlying heterogeneity in the skill and quality of GPs could lead to heterogeneity in performance and to more persistence if new entrants cannot pete effectively with existing funds. Several forces might make it difficult to pete with established funds. First, many practitioners assert that unlike mutual fund and hedge fund investors, private equity investors have proprietary access to particular transactions。 that is, “proprietary deal flow.” In other words, better GPs may be able to invest in better investments. Second, private equity investors typically provide management or advisory inputs along with capital. If highquality GPs are scarce, differences in returns between funds.2 These results and most of the analyses that follow do not explicitly adjust for differences in systematic risk or liquidity risk. We discuss this in some detail in the text. 3 See Carhart et al. (2002) for a prehensive review of this topic and Berk and Green (2002) for a model of mutual funds returns and capital flows. Our findings on persistence also differ from those for hedge funds, which provide little or modest evidence of persistence. See Bares, Gibson, and Gyger (2002), Brown, Goetzman, and Ibbotson (1999), Edwards and Cagalyan (2001), and Kat and Menexe (2002). Private Equity Performance 1793could Third, there is some evidence that better VCs get better deal terms (., lower valuations) when negotiating with startups (see the paper by Hsu (2004)). A startup would be willing to accept these terms if some investors provided superior management, advisory, or reputational inputs.If heterogeneity in GP skills drives the persistence results, it is puzzling that the returns to superior skill are not appropriated by the GPs through higher fees and larger funds, as has been suggested for mutual funds (see Berk and Green (2002)). From Gompers and Lerner (1999), we know that pensation was relatively homogeneous during our sample period. Most funds used a pensation scheme of a –% annual management fee and a 20% carried interest or share of the profits. To the extent that there are systematic differences, Gompers and Lerner (1999) find that profit shares are higher for older and larger GPs, the GPs that tend to perform well. Alternatively, GPs could try to increase their pensation by growing the size of the But we find that on average, the top performing funds grew proportionally slower than the lower performing funds in our sample period.Our results suggest that petitive forces did not