Predictive Characteristics for the Cross-Section of Private Equity Returns

This research applies findings from the field of factor investing to address the question of what drives private equity deal returns. I provide empirical evidence that the most comprehensively documented factor anomalies have explanatory power of cross sectional variations in returns of private equities deals. Consistent with findings from public equities, I find that the value and quality factors are economically and statistically meaningful effects also in private equity markets. I document that the returns differential between top and bottom sorts portfolios are up to five times larger than those observed the public market. The low risk appears to be present as no clear relationship emerges between the amount of risk and returns. The size effect appears to be less pronounced. Results are robust to commonly used methodologies in the field of factor investing