The many hits and misses of video game private equity investments

Abstract

Often called the “superstar effect,” the presence of large right tails has been studied in a number of areas including film, music, and software. This paper highlights the superstar effect of the video game industry through the lens of private equity investment, that is, through the value accretion of video game investment and investor returns. We show that video game investments have exhibited a Pareto distribution, very close to the Pareto law of 80/20, and exhibit a more pronounced right tail than private equity investments in entertainment, software, general private equity, and even general venture capital. The pronounced right tail in private video game investment has led to poor median outcomes relative to comparables, which is to say, private video game investments have exhibited starker “hit or miss” outcomes. That said, the right tail in private video game investments has been sufficiently strong so as to generate aggregate value accretion and investor returns that have been typically on par with or better than comparables, and even relatively small portfolios of video game investments could mitigate the outsized reliance on outlier investments to the point of having delivered median performance on par with or superior to comparables.