Do Private Equity Funds Manipulate Reported Returns?

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, this paper tests for the presence of reported return manipulation. It finds evidence that some under-performing managers boost reported returns during times when fundraising takes place. However, those managers are unlikely to raise a next fund, suggesting that investors see through much of the manipulation. In contrast, it also finds that top-performing funds likely understate their valuations. [Working Paper 22493]