Private equity fund general partners (GPs) strategically adjust their investment strategies in response to early returns. Funds experiencing higher early returns in the fund life cycle subsequently shift away from riskier investments in later years and experience lower returns. After early success, funds become more selective and concentrated, reducing exposure to high-ris sectors while focusing investments within preferred sectors and geographies. Early winners also commit larger portions of capital to later deals and hold these investments for longer periods. In contrast, funds with very low early returns do the opposite. Despite making low-return and low-risk investments later on, funds with strong early returns still outperform over the life of the fund and raise their next fund faster. These findings are consistent with GPs using early success in a fund to raise a next fund sooner and then turning their attention to this next fund.
Richard Maxwell, UNC Kenan-Flagler Business School
