The Case against Scale: Empirical Evidence of Underperformance in Large Secondary Funds

TL;DR

This paper challenges the common belief that larger secondary private equity funds outperform smaller ones, providing empirical evidence that smaller funds often deliver better IRRs, prompting a reassessment of investment strategies.

Contribution

It offers new empirical evidence showing smaller funds outperform larger funds in IRRs, questioning the assumed advantages of scale in secondary private equity markets.

Findings

Smaller funds have higher IRRs than larger funds.

Larger funds do not demonstrate the expected operational efficiency benefits.

Investors should reconsider fund size in their allocation strategies.

Abstract

The paper analyses the increasing popularity of large funds in the secondary private equity market, which are pegged on the perceived larger scale advantages of operational efficiency and fewer manager relationships (Reuter & Zitzewitz, 2021). However, it has been proved empirically that smaller funds perform better than the big ones in terms of their internal rates of return (IRRs). This work questions this authoritative view, providing evidence of outperformance of smaller funds relative to their larger counterparts. This research shows us the benefits that smaller funds possess. Thus, investors must revisit their allocation strategy to prioritize larger funds automatically (Gualandris et al.,2021).