Private Equity Fund Performance Signals and the Likelihood of Follow-on Fundraising

Drawing upon signaling theory and the attention-based view of the firm, we study if signal receivers attend differently to different types of signals when they interact with different firms or operate under different market conditions. Our theorizing and empirical analysis is situated in the context of the follow-on fundraising activities by private equity managers managing a first fund. Using a sample of 238 private equity partnerships, we find that overall performance of the first private equity fund and its two components, namely realized performance and unrealized performance, positively influence the likelihood of raising a follow-on fund. Nevertheless, the impact of realized performance on fundraising is less important for funds investing in early stage companies (early stage funds) as compared to funds investing in mature companies (late stage funds). Moreover, realized performance is a more important signal to fund investors in hot equity markets than in cold equity markets.