When assessing the drivers of a complex system, such as a private equity fund for instance, common sense and intuition can only get you so far. The effect of dividend recaps on holding periods and performance is a good example. One might draw reasonable assumptions by combining logic with a ‘feel’ for the prevalence of the technique. But there is a risk here.

Given their nature, dividend recaps tend to be more reported on in the news than other performance drivers. This could lead to an availability heuristic that over-weights their importance. Achieving an empirical view of their aggregate effect can also prompt other questions, such as the motivation of managers to undertake dividend recaps, beyond that of enhancing an individual fund’s performance.

This edition of Frontline draws upon Pevara data to conduct such an empirical study. The results, while not definitive, highlight the danger of relying on a priori reasoning when it comes to private equity performance analysis.

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