Buyout shops report spike in performance before fundraise

Michael Bow
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PRIVATE equity funds are ramping up their valuations by reporting better performance for investments during their fundraising stage than at other times, a major academic study says.

Researchers at the University of Oxford found the net asset value of a fund – typically used as a measure of performance – spiked in the year leading up to when the first batch of money is collected, suggesting values increase at the point they are marketed to investors.

The study, released by Professor Tim Jenkinson, said performance tended to be valued conservatively over the life of the fund but then inflated during the fundraising period.

“Over the five quarters preceding the first close of the follow-on fund, the valuations of our sample of funds show a significant abnormal increase. This increase peaks in statistical and economical terms three to four quarter before the follow-on fund had its first close”, it said.

The performance used during fundraising was also uncorrelated to final performance of the follow on fund, the study found.

The study examined performance data from 330 funds who had gone on to raise a second follow on fund.

It also found fund values jumped in the fourth quarter, coinciding with the normal time when they are audited.