Skill and Luck in Private Equity Performance

We evaluate the performance of private equity (PE) funds, using a variance decomposition model to separate skill from luck. We find a large amount of long-term persistence, and skilled PE firms outperform by 7% to 8% annually. But this performance is noisy, with a large amount of luck, so top-quartile performance does not necessarily imply top-quartile skills, making it difficult for investors (LPs) to identify skilled PE firms. Buyout (BO) firms show the largest skill differences, implying the greatest long-term persistence. Venture capital (VC) performance is the most noisy, making good VC firms hardest to identify, and implying the smallest amount of investable persistence.