Investor Size and Division of Labor: Evidence from a Survey of Private Equity Limited Partners

Using a comprehensive survey, we show that investors with a larger capital allocation to private equity are more specialized and have a wider scope of due diligence and investment activities. Smaller investors tend to free ride on decisions made by larger investors. Other investor characteristics (experience, type, location, compensation structure, number of funds under management) play no role. These results are consistent with increasing returns to scale for due diligence, and with the savings generated by increased scale going into increasing scope rather than into cost reduction. Our findings provide an explanation for the observed outperformance of larger investors when it comes to investing in private equity.