Persistent underperformance in private equity is commonly attributed to uninformative performance signals. We show that permissive continuation rules, not poor signal quality, allow low-skill managers to persist. Buyout LPs strongly discipline underperformance through switching, venture capital LPs enforce at one-quarter the sensitivity, and real estate LPs do not respond to performance at all. These differences hold within the same investor across asset classes, and counterfactual experiments attribute 72 to 98 percent of cross-asset variation in survivor quality to discipline rather than learning. The sources of weak enforcement differ: venture capital has the highest exit rate yet its exits are poorly linked to performance, producing uninformative turnover that terminates skilled and unskilled managers alike; in real estate, return smoothing degrades the signal, and LP staff with prior GP experience are less willing to act on whatever signal remains. Using novel employee-level data, we provide the first evidence that personnel connections between LP and GP staff weaken investment discipline.
Yongqian Chu, University of North Carolina – Charlotte
Da Li, University of Cincinnati
Tim Riddiough, University of Madison – Wisconsin