Private Equity Returns and Disclosure around the World*

This paper studies the returns to venture capital and private equity investment based on a sample of 221 private equity funds that are managed by 72 private equity management firms, in 5040 entrepreneurial investee firms, and spanning 33 years (1971 – 2003) and 39 countries from North and South America to Europe and Asia. We make use of four main categories of proxy variables for value-added activities and risks that explain venture capital and private equity returns: market and legal environment, fund characteristics, entrepreneurial firm characteristics, and the characteristics and structure of the investment. We further compare actual unrealized returns, as reported to institutional investors, to the predicted unrealized returns based on the estimates of realized returns. We show that significant systematic biases exist in the reporting of unrealized investments to institutional investors, depending on the level of the earnings aggressiveness and disclosure indices in a country, as well as proxies for the degree of information asymmetry between institutional investment managers and venture capital and private equity fund managers.