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I n this article, I study the relation between macroeconomic conditions and private equity fund returns. My findings show that the business and stock market cycle determine final private equity fund returns. Results are based on a hand-collected dataset, including the complete cash flow histories between 531 private equity funds and their investors.
Over the last decades, private equity has experienced enormous growth. Since the late 1980s, the private equity industry's cumulative assets under management (AUM) have increased to around $3.5 trillion (tn) in 2013 (Preqin [2014]). Thus, private equity has become a major asset class for institutional investors. In the United States, for example, public and private pension funds allocate over 5% of their AUM of around $16 tn to private equity (Talmor and Vasvari [2014]). This development has increased the importance of understanding this alternative asset class.
Accordingly, there is a growing body of literature that analyzes such investments. The majority of academic research focuses on absolute returns as well as returns relative to the public stock market. Despite this increase in the literature on private equity in general and private equity performance in particular, only a few articles shed light on possible determinants of the performance of private equity funds. Existing studies range from research analyzing the influence of endogenous data, such as fund characteristics, to studies examining the impact of exogenous data, such as macroeconomic conditions, on private equity performance.
In the academic literature, different macroeconomic variables have been suggested as potential determinants of private equity fund returns. Phalippou and Zollo [2005], Aigner et al. [2008], and Gresch and von Wyss [2011], for example, uniformly show that private equity fund returns are procyclical, profit from low interest rates, and coincide with the public stock market.
Similar to previous research, the goal of this article is to analyze the influence of the business and the stock market cycle on private equity fund returns. In particular, using linear regressions, I study the impact of economic growth and interest rates as well as stock market returns and valuations on final private equity fund returns. I do not claim to propose a model to predict fund returns. Rather, I aim to assess the influence of macroeconomic conditions on returns. Thereby, the internal rate of return...