Hi {{first_name}},

I went digging through last year's private equity returns recently, and one number stopped me. Private equity returned 9.4% in 2024. That's probably not the number that comes to mind when you hear someone talk about PE.

I invest in deals underwritten to returns well above that, at least on paper. I also know there's often a gap between projected returns and what investors ultimately receive. Even so, this gap felt too large to dismiss as normal.

The obvious explanation was size. Firms like Blackstone and KKR are deploying capital by the billions, racing to put it to work before the investment period closes. I wanted to know whether fund size actually explains the return gap. It does. And now there's data to put a number on it. 

This research also doubled as diligence for how I structure my own capital. I invest through vehicles built this way, so that bias is worth acknowledging.

Forget the pitch decks and the brand names for a minute. What does the evidence actually suggest you should do with your own investments? Answering that question is big enough I’m tackling it across two issues.  

First, what fund size costs you before you've even picked a company. Then, what happens to that discount once you've found it, and why most investors who find it still don't keep it.

Two issues ago, we used an 18% return in a hypothetical example, but I left one question unanswered. How common is a return like that, really? This week, I’m coming back to answer it. I’m sharing:

— Walker Deibel
WSJ & USA Today Bestselling Author of Buy Then Build
Founder, Build Wealth

Fund size has a break-even point, and the industry hasn’t needed to explain it before.

Prior to 2025, every study on the question of fund size had the same significant flaw. Good managers raise bigger funds so any comparison across fund sizes was measuring two things at once. First the manager quality, and second, the fund size and no way to separate them. They were correlated.

Then a 2025 study finally separated them by finding new commitments that increase AUM made for reasons that weren’t connected to performance. University endowment gifts.

Money is given to a university because of something in the donor's life. It’s personal. The endowment, in turn, is roughly 25x more likely to commit to a manager's next fund if it backed the last one — so that gift flows through to the manager as a bigger fund. The manager holds steady, the market holds steady, and the fund grows for reasons outside the manager's control.

Run that experiment at scale and the number comes out clean. Every standard deviation jump in fund size (about $2.06 billion) resulted in a reduction of net IRR by 11% of the mean, and cut of the net multiple by 28%. There’s a good reason why. Strip the price gap down and it runs on three forces, each pushing returns the same direction.

Force 1: The Price Goes Up First

The first force shows up before a deal even closes. 

PitchBook's Q1 2026 middle market report puts 2025 entry multiples at:

GF Data, tracking a separate universe of deals, found the same shape:

Then a separate Cambridge Associates study looked at what that price gap does to returns and found the cheapest quartile of companies purchased ended up delivering the best outcomes. A median 2.6x and average 3.1x MOIC. 

Small-cap companies make up the largest share of that cheaper end cohort. A bigger fund will overpay by necessity. There are only so many $30 million companies for sale in a given year, and a fund holding $3 billion has to write bigger checks into fewer, more expensive targets to get the capital deployed.

Force 2: The Debt Does the Work Instead

The second force is leverage. 

The same PitchBook report carries the data. SPI by StepStone puts net debt to EBITDA at 5.2x for the $500 million to $1 billion band, against 2.5x for the $25 million to $100 million band. 

The NBER paper (that 2025 study) found the same pattern from the causal side. Larger targets enter a deal already more profitable and already more leveraged, and their profitability grows measurably slower once they arrive that indebted. By the time a fund this size closes a deal, what it's buying is leverage. The operational improvement already happened, under someone else's ownership, before the fund showed up.

Force 3: The Fee Doesn't Care Either Way

The third force works on incentive rather than price or debt. 

Management fee revenue scales linearly with committed capital, regardless of what the fund returns. A different Cambridge Associates study puts the average fund-level fee drag at 616 basis points, roughly 0.2x of MOIC over a fund's full life. 

Once that fee is large enough, the NBER paper argues, the manager's behavior changes. Bigger funds push GPs toward larger deals with less room for operational improvement, and toward a fee stream that doesn't depend on how any of it turns out. The authors have a name for it. They call it a "quieter life."

And they put a number on what it costs. That shift toward larger, less hands-on deals accounts for roughly 60% of the total drag fund size puts on returns and per-deal IRR falls 6.75%, against the 11% hit at the fund level.

Where the Math Turns 

Run the three forces together, and a threshold falls out of the model at $1.12 billion. 

Below it, added scale helps both sides. Above it, the manager's economics keep improving while the investor's deteriorate. LP net present value peaks at that number which is the 68th percentile of the funds studied. Then it turns negative above $2.61 billion. 

GP net present value keeps rising the whole way, almost without limit.

You may have been expecting a point of diminishing returns, instead, it’s a point of deterioration.

The $1.12 billion figure comes from a stylized model: 2-and-20 terms, an 8% hurdle, a 12% discount rate, vintages 2000 to 2017, funds above $100 million with endowment relationships. Halve the underlying coefficient and the threshold moves to $1.67 billion. Double it and it drops to $0.79 billion. The exact number depends on the assumptions. The direction holds across all of them.

LP value peaks at $1.12 billion. GP value keeps rising past it. The manager decides which one to build.

That's the design working as intended. Bigger funds pay more for what they buy, borrow more against it, and collect the same fee whether any of it works. Seeing what that looks like inside an actual deal will help bring it to life.

If the breakeven holds, smaller funds should be handing investors more actual cash — and they are. We lay out the DPI evidence in this week’s report. 

But fund size is only the beginning of the story. What happens when that capital reaches the deal level?

A one standard deviation increase in fund size raised average deal size by $48 million, about 50% more than the sample average deal size. A 1% increase in deal size cut a deal's gross IRR by 0.19 percentage points. Across the full dataset, deal size alone explains more than 60% of the total decline in fund returns as funds grow.

Larger Fund → Larger Deals → Higher Entry Prices → Lower Returns

Basically a $500 million fund and a $20 billion fund are not shopping in the same market. The larger fund needs larger transactions to put capital to work. But the pool of attractive larger companies is smaller, which creates more competition and pushes prices higher.

Imagine two funds raising capital in the same year, pursuing similar companies in the same sector. One writes $30 million checks. The other writes $150 million checks.

At 2025's prevailing multiples, the smaller fund buys its target around 8.8x EBITDA. The larger fund, competing for a bigger company in a shallower pool of sellers, pays closer to 13.4x. The smaller fund's target carries about 2.5x net debt to EBITDA. The larger fund carries about 5.2x.

Same Year, Sector & Thesis.

One fund pays less for the business and gives itself more room for operational improvement. The other starts with a higher valuation and more leverage before a dollar of profit shows up.

The size discount carries its own risk profile. Cambridge Associates found small and mid-cap deals averaged a 2.8x MOIC against 2.4x for large deals, and that small companies produced both the highest share of investments returning more than 5x and the highest share returning less than 0.5x. Both tails widen at the cheap end. Offering more big winners and more outright losses.

A second Cambridge finding sorts by entry valuation instead of company size. The cheapest quartile purchased produced the best returns. The most expensive quartile produced the lowest share of losing investments, at 19%, with the tightest band of outcomes of any group. Cheap wins on upside. Expensive wins on downside protection. 

The two findings correlate, since small companies make up the biggest share of that cheap cohort. 

When you do get asked to invest or you are ready to identify your next investment. You’ll have four questions to ask any sponsor before you wire capital.

1. What is your average check size relative to fund size? 

A manager writing $10 million checks out of a $150 million fund is sizing positions around what a company is WORTH. A manager writing $10 million checks out of a $3 billion fund is sizing positions around how FAST the capital needs to move. 

The ratio tells you which one you're in front of.

2. What entry multiple did you pay on your last three deals, and what did comparable public companies trade at? 

This is the Size Tax showing up in a manager's own numbers rather than an aggregate data set. A gap that consistently runs wide against public comparables is the same pattern at market level that you read about earlier in this issue.  Now showing up one deal at a time.

3. What share of your last fund's return came from EBITDA growth vs. multiple expansion?

Every exit makes money one of two ways. Either the company's earnings grew, or the market simply decided companies like it are worth a higher multiple than the fund paid. The first is the operator's work. The second is the market's mood.

A fund that made its money on multiple expansion got paid by timing. A fund that made its money on earnings growth got paid by the work and that's the one that can do it again.

Ask for the split. A manager who can't answer this (or won't), has answered anyway. 

4. What does your deployment pace look like against your stated investment period? 

A fund racing to place capital before its investment period closes is a fund under exactly the deployment pressure that forces overpaying. 

Ask three things:

The pace you see answers the question the entry multiple only implies.

A manager sizing to the company can answer all four of these questions without flinching. A manager sizing to their own fee will dodge at least one of them.

The size discount is real, but it's a market average. You capture it by underwriting the specific company, the specific price, and the specific operator in front of you. 

"A fat wallet, however, is the enemy of superior investment results." — Warren Buffett

Buffett learned the size penalty on his own capital, in the partnership years, long before Berkshire.

Fund size has a breakeven point. Below it, growth pays everyone. Above it, growth keeps paying the manager and the manager decides how big to grow.

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This is not financial advice. Illustrative output of a reasoned thought experiment. Not a backtest, guarantee, or prospectus. Actual results vary based on market conditions, fund selection, timing, fees, taxes, and factors not modeled. Private credit, CRE, and leveraged strategies involve significant risk including loss of principal. Consult a qualified financial advisor.