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Do Private Equity Funds Manipulate Reported Returns?

Executive Summary

Professor Steven N. Kaplan, along with Gregory W. Brown at the University of North Carolina at Chapel Hill and Oleg Gredil at UNC’s Kenan-Flagler Business School, examined whether uncertainty in a fund’s asset valuation gives rise to the potential for fund managers to manipulate reported net asset values.


Private equity funds hold assets that are hard to value. Managers may have an incentive to distort reported valuations if these are used by investors to decide on commitments to subsequent funds managed by the same firm. Using a large dataset of buyout and venture funds, we test for the presence of reported return manipulation. We find evidence that some underperforming managers inflate reported returns during times when fundraising takes place. However, those managers are less likely to raise a next fund, suggesting that investors can see through the manipulation on average. In contrast, we find that top-performing funds likely understate their valuations. A simple theoretical framework rationalizes our empirical results as well as those of related papers.

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