0.96 for investments in funds indicates that LP returns to investors in private equity funds in the IFC portfolio, net of management fees, have performed almost as well as the S&P 500. Though less than 1.00, a PME of 0.96 implies only 4 percent difference in long run returns, which is quite small in annualized terms. This return is within the range of those reported by Harris et al. (2014) for venture capital and leveraged buyout funds in the U.S. market. In contrast, the PME of the IFC’s portfolio of direct investments, which are gross of fees, is 1.19. After subtracting a hypothetical management fee and carry, the PME of this portfolio is 0.96. Our interpretation of this result is that over the long run the IFC’s portfolio of emerging market private equity has done about as well as the S&P 500 index.<sup>3</sup> Second, to what extent can country conditions predict future returns, particularly from private investments? International capital markets may be segmented, restricting access to finance for firms in certain economies. Consistent with this hypothesis, we find that returns are lower when economies relax capital controls and deepen the banking sector. These results are inconsistent with the hypothesis of a perfectly integrated international capital market in which expected financial returns are equalized across economies, and suggest that the greatest returns are available in economies transitioning from closed to open. These findings constitute the most comprehensive microeconomic evidence available on this long-standing question (see Feldstein and Horioka 1980, Lucas 1990, Caselli and Feyrer 2007, Alfaro et al. 2008, Gourinchas and Jeanne 2013, Chari and Rhee 2020).

We also measure the relationship between realized returns and macroeconomic conditions more generally. One percent greater cumulative annualized real GDP growth over the life of the average investment (eight years) is associated with an additional 6.62 percentage points of return. Local currency depreciation, on the other hand, worsens performance, whereas local inflation (controlling for the depreciation) is associated with higher returns. There is some evidence that returns improve with reductions in sovereign risk during the investment period. These results are consistent with the intuition that strong macroeconomic fundamentals are important for countries seeking to attract capital investment (Mauro 2003), although this effect could diminish over time as incomes converge (Kremer et al. 2021, Patel et al. 2021). Quantitatively, however, less integrated markets appear to be more important than economic growth. A decrease in financial openness or banking system depth by one standard deviation is associated with a larger increase in returns than a one percent rise in average annual real GDP growth over the investment period.

Third, how does private equity performance vary with other investment characteristics not

> 3This result sheds light not only on returns to LP investors, but also on returns more similar to what a closed-end sovereign wealth fund might obtain (Bernstein et al.’s 2013 examination of the investment strategies of sovereign wealth funds lacks data on returns). Although the IFC invests on a large scale (total estimated fair value of equity investments in fiscal year 2020, ending June 30, was $10.4 billion), a few other funds (e.g., SoftBank, Temasek, Norges) deploy on an even larger scale, but few papers provide the perspective afforded by employing data on the complete portfolio of a single private equity investor. Gompers and Lerner (1997) study the portfolio of Warburg Pincus, and Kerr et al. (2014) the portfolio of two prominent angel investment groups, Tech Coast Angels and CommonAngels.

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