Private Equity

Paper Session

Friday, Jan. 6, 2017 2:30 PM – 4:30 PM

Sheraton Grand Chicago, Chicago Ballroom VIII
Hosted By: American Finance Association
  • Chair: Ayako Yasuda, University of California-Davis

Private Equity’s Unintended Dark Side: On the Economic Consequences of Excessive Delistings

Alexander Ljungqvist
,
New York University
Lars Persson
,
Research Institute of Industrial Economics
Joacim Tag
,
Research Institute of Industrial Economics

Abstract

Over the past two decades, the U.S. stock market has been shrinking as the public firm model has begun to fall out of favor. We develop a political economy model of delistings to study the wider economic consequences of this trend. We show that the private and social incentives to delist firms from the stock market need not be aligned. Delistings can inadvertently impose an externality on the economy by reducing citizen-investors' exposure to corporate profits and thereby undermining popular support for business-friendly policies. By facilitating companies' departures from the stock market, private equity firms can trigger a chain of events that may lead to long-term reductions in aggregate investment, productivity, and employment.

Financial Intermediation in Private Equity: How Well Do Funds of Funds Perform?

Robert Harris
,
University of Virginia
Tim Jenkinson
,
University of Oxford
Steven Kaplan
,
University of Chicago
Rudiger Stucke
,
University of Oxford

Abstract

This paper focuses on funds of funds (FOFs) as a form of financial intermediation in private equity (both buyout and venture capital). After accounting for fees, FOFs provide returns equal to or above public market indices for both buyout and venture capital. While FOFs focusing on buyouts outperform public markets, they underperform direct fund investment strategies in buyout. In contrast, the average performance of FOFs in venture capital is on a par with results from direct venture fund investing. This suggests that FOFs in venture capital (but not in buyouts) are able to identify and access superior performing funds.

Pay Now or Pay Later? The Economics Within the Private Equity Partnership

Victoria Ivashina
,
Harvard Business School
Josh Lerner
,
Harvard University

Abstract

The economics of partnerships have been of enduring interest to economists, but many issues regarding intergenerational conflicts and their impact on the continuity of these organizations remain unclear. We examine 717 private equity partnerships, and show that (a) the allocation of fund economics to individual partners is divorced from past success as an investor, being instead critically driven by status as a founder, (b) that the underprovision of carried interest and ownership—and inequality in fund economics more generally—leads to the departures of senior partners, and (c) the departures of senior partners have negative effects on the ability of funds to raise additional capital.

Political Representation and Governance: Evidence from the Investment Decisions of Public Pension Funds

Aleksandar Andonov
,
Erasmus University Rotterdam
Yael Hochberg
,
Rice University
Joshua D. Rauh
,
Stanford University

Abstract

We examine how political representatives affect the governance of organizations. Our laboratory is public pension funds and their investments in the private equity asset class. Representation on pension fund boards by state officials or those appointed by them — often determined by statute decades past — is strongly and negatively related to the performance of private equity investments made by the fund. This underperformance is driven both by investment category allocation and by poor selection of managers within category. Funds whose boards have high fractions of members who were appointed by a state official or sit on the board by virtue of their government position (ex officio) invest more in real estate and funds of funds, explaining 20-30% of the performance differential. These pension funds also choose poorly within investment categories, overweighting investments in small funds, in-state funds, and in inexperienced GPs with few other investors. Lack of financial experience contributes to poor performance by boards with high fractions of other categories of board members, but does not explain the underperformance of boards heavily populated by state officials. Political contributions from the finance industry to elected state officials on pension fund boards are strongly and negatively related to performance, but do not fully explain the performance differential.
Discussant(s)
Ulf Axelson
,
London School of Economics and Political Science
Arthur Korteweg
,
University of Southern California
Elena Simintzi
,
University of British Columbia
Denis Sosyura
,
University of Michigan
JEL Classifications
  • G2 - Financial Institutions and Services