What do these findings mean for LPs’ decision-making? Does it imply that investors should be moving away from larger funds?
Sabrina Howell: The results don’t imply that big funds should necessarily be avoided. A better GP with a larger fund will outperform a bad GP with a small fund. But if an LP faces the same thesis and goes with a larger fund, then there is a trade-off. LPs can deploy more capital with the larger fund, but will face lower returns. I would add that the results also suggest that very large funds raised for retail investors may struggle to meet industry expectations.”
The results suggest that if a fund increases in size by 10%, which is not an unreasonable shift, the IRR will drop by 1%.
Josh H Lerner, Harvard Business School
William Megginson: “I would have to agree. It seems inevitable now that not just the extremely wealthy, but also the affluent mass market, will soon be participating widely in PE. I think returns are bound to diminish as a result. They may well remain above those possible in public markets, but they will diminish nonetheless, given the massive increases in fund size that are bound to result.”
