Impact of Geographical Diversification and Limited Attention on Private Equity Fund Returns

Abstract

This article analyzes the effect of geographical diversification on global private equity (PE) fund returns. We find that there is a negative correlation between geographical diversification and PE fund returns. To establish the causality between geographical diversification and PE fund returns, we employ an instrumental variable analysis where the instrument used is the stock market capitalization of the host country where the PE fund is based. Our results apply to Net IRR, TVPI, and DPI as dependent variables used to proxy for PE fund returns in the main regression model. A one standard deviation increase in geographical diversification results in an 18.8 percent reduction in PE fund returns from a Net IRR perspective in the main regression model. Fund age and industry diversification mitigate the negative correlation between geographical diversification and fund returns. The relationship between geographical diversification and PE fund returns follows an inverted U shape function. Additional robustness tests further reinforce the findings.