Comparative Analysis of Venture Capital vs. Buyout Funds: How Does Reputation and Experience Impact Performance?

Abstract

Over the past few decades, there has been an increasing concern about private equity funds. The reason lies in its different characteristics against more traditional assets. The two most known strategies leading this industry are venture capital and leverage buyout funds. However, these two strategies overlay distinctive properties in terms of their structure and type of investment they target. As such, this paper compares the impact of reputation and experience on performance among the two strategies. Using a sample of approximately 2000 funds from the Prequin database, evidence shows that performance persists strongly inside the private equity group. When it comes to the experience, this paper shows a positive relationship on performance when proxied by the number of funds raised in the past by the manager, notably for high sequence numbers. At first glance, the returns appear deteriorated for larger funds, suggesting the non-scalability of the strategy. However, such a relationship is only valid when controlling for the impact among the two strategies. The robustness of these results is confirmed using three performance measures: the IRR, the TVPI, and the KS-PME.