Information Spillovers and Performance Persistence in Private Equity Partnerships

We present a simple model that rationalizes performance persistence in private equity partnerships. In contrast to the model for mutual funds of Berk and Green (2004), the learning in our model pertains to profitability associated with an emerging sector or an innovative trading strategy, rather than ability specfiic to the fund manager. As a result of potential information spillovers, which would increase competition in the sector if informed investors were to partner with nonincumbent managers, incumbent managers will let informed investors benefit from increases in estimated profitability following high realized returns in the sector.