Pursuit of Excess Returns: Deciphering Performance in European Buyout Funds A Detailed Exploration of Relative Returns and Their Determinants

Abstract

This paper investigates the relative performance of European buyout funds compared to public markets. Using a sample of mature buyout funds, obtained from European limited partners, with vintages between 1995 and 2013, we find that a European buyout fund, on average, outperforms the STOXX Europe 600 index by 52% over its lifetime. While our findings display considerable robustness to various assumptions regarding the opportunity cost of capital, systematic risk, and unrealized portfolio values, they also highlight an interesting sensitivity to inter-year variations in relative returns. Our study contributes to the ongoing debate about the performance of private equity funds, and the potential determinants of performance, such as fund size, prespecified target industry, and experience of fund managers. We find evidence for a narrower investment focus and sector-specific effects positively influencing performance, findings valuable to investors, academia, and stakeholders alike.