Private Equity–Where Has All the Alpha Gone?

Private Equity–Where Has All the Alpha Gone?

February 25, 2013 Research Insights
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(Last Updated On: January 13, 2017)

Limited Partner Performance and the Maturing of the Private Equity Industry

  • Berk A. Sensoy, Yingdi Wang, and Michael S. Weisbach
  • A version of the paper can be found here.
  • Want a summary of academic papers with alpha? Check out our free Academic Alpha Database!


We evaluate the performance of limited partners’ (LPs) private equity investments over time. Using a sample of 14,380 investments by 1,852 LPs in 1,250 buyout and venture funds started between 1991 and 2006, we find that the superior performance of endowment investors in the 1991-1998 period, documented in prior literature, is mostly due to their greater access to the top-performing venture capital partnerships. In the subsequent 1999-2006 period, endowments no longer outperform, and neither have greater access to funds who are likely restrict access nor make better investment selections than other types of institutional investors. We discuss how these results are consistent with the general maturing of the industry, as private equity has transitioned from a niche, poorly understood area to a ubiquitous part of institutional investors’ portfolios.

Data Sources:

VentureXpert and Capital IQ from 1991 to 2006.

Alpha Highlight:

No Alpha highlights; only negative alpha highlights.

Strategy Summary:

  • Paper summarizes the private equity (PE) returns of different types of investors from 1991 – 2006.
    • Only considers venture capital (VC) funds and buyout funds.
    • Splits the sample into 2 time periods, from 1991 – 1998 and 1999 – 2006.
  • Shows the PE industry is maturing, as there is a industry-wide decline in returns, mainly driven by VC funds.
  • Finds that endowments significantly outperform other investors from 1991 – 1998, but have similar returns to other investors from 1999 – 2006.
  • Paper argues that endowments’ good performance was driven by access to the best funds in the 1991 – 1998 period, not by their skill at picking funds.  Base this off four main points:
    1. The endowments higher returns from 1991 – 1998 were driven by endowments’ VC investments, not their buyout investments.  If endowments had superior skill, they should have outperformed in both their VC investments as well as their buyout investments.
    2. When looking at endowments’ reinvestment decision from 1991 – 1998, they earned 62.6% on their reinvestments and  59.2% when choosing not to reinvest.  So endowments had access to top VC funds at the time.
    3. Endowments do not outperform other investors when comparing returns for first-time funds (even over 1991 – 1998), which would be a test of superior skill.
    4. From 1991 – 1998, endowments are more likely to invest in funds with limited access, and these funds outperformed other funds at the time.


  • Good summary paper showing that acces to better funds appears to be the main driver of endowments’ great returns over the 1991 – 1998 period.
  • Also shows that the industry is maturing, as returns in general are much lower in the later time period.

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Definitions of common statistics used in our analysis are available here (towards the bottom)

About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes,, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.