Do Private Equity Fund Managers Opportunistically Smooth Fund Performance for Private Gain?

Private equity is a substantial and growing component of institutional investors’ portfolios. Investors rely on manager-reported fund performance when making capital allocation decisions, yet reported performance is subject to significant manager discretion. I examine whether private equity fund managers opportunistically smooth fund performance for private gain. Using Burgiss’ proprietary private equity dataset, I find that fund managers report smoother fund performance before raising capital for new funds and when fund managers are publicly traded firms. The effect of fundraising on performance smoothness is greater for less established fund managers and for lower performing funds. The findings support the hypothesis that fund managers opportunistically smooth performance for private gain, an inference that is robust to the inclusion of fund and fund manager controls. My findings are relevant to fund investors making allocation decisions and regulators as they consider increasing private equity regulation