“Local Overweighting and Underperformance: Evidence from Limited Partner Private Equity Investments” by Yael Hochberg
Joshua D. Rauh
We examine the allocations and performance of institutional investor investments in private equity funds. Institutional investors of all types exhibit substantial home bias when investing in PE funds, allocating proportionally more of their portfolio in funds based in their home state. This effect is particularly pronounced for public pension funds, where the local overweighting amounts to about 10% of the private equity portfolio on average. Public pension funds‟ own-state investments perform significantly worse than their out-of-state investments, an average of 3-4 percentage points of net IRR per year, and those that that overweight their portfolios towards home-state investments perform proportionally worse. These underperformance patterns are not evident for other types of institutional investors, such as endowments, foundations and corporate and private pension funds. Overweighting in home state investments by public pension funds is greater in states with higher levels of corruption, although underperformance in homestate investments is negatively correlated with corruption for these investors. The overweighting and underperformance of local investments cost public pension LPs approximately $1.8 billion per year.