On the Performance of Private Equity Investments: Does Market Timing matter?

Eric Nowak*, Alexander Knigge**, and Daniel Schmidt*** First Version: October 2003 This Version: March 2004

Abstract This paper investigates the market timing abilities of private equity fund managers using a unique set of detailed cash-flow data. We show that investment timing has an impact on the performance of venture capital funds. Surprisingly, divestment timing has no such impact on returns. For later-staged buyout funds our analysis reveals that fund performance is not driven by market timing but is significantly related to the experience of the individual fund manager. Thus, for successful investing into more mature portfolio companies, getting …ver más…

Surprisingly, divestment timing has no such impact on returns. For later-staged buyout funds our analysis reveals that fund performance is not driven by market timing but is significantly related to the experience of the individual fund manager. Thus, for successful investing into more mature portfolio companies, getting access to better deal flow and managing the investment affect the resulting success of these investments. Our results complement other recent findings on the performance of private equity funds.

JEL Classification: G23, G11. Keywords: Private equity; Venture capital; Fund management; Market timing.

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“As with most things, Timing Is Everything. And if you can't control the timing, then what happens is very dependent on luck.” (Bob Johnson, Managing Partner, Founders Capital Partners, Timing is Everything: What’s New in Venture Capital, what matters, MIT alumni opinion column, February 2002.)

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Introduction
Private equity plays an essential role for financing innovative companies and business sectors in the economy. These funds not only constitute an important source of financial funding but also represent a key monitoring device for young growth companies. Although research interest in private equity has increased remarkably during the last years, little is still known about the performance characteristics of private equity as an asset class. This paper