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Private Equity

Paper Session

Monday, Jan. 4, 2021 10:00 AM - 12:00 PM (EST)

Hosted By: American Finance Association
  • Chair: Ayako Yasuda, University of California-Davis

Ownership, Wealth and Risk Taking: Evidence on Private Equity Fund Managers

Carsten Bienz
,
Norwegian School of Economics
Karin Thorburn
,
Norwegian School of Economics
Uwe Walz
,
Goethe University-Frankfurt

Abstract

We examine the incentive effects of private equity (PE) professionals’ ownership in the funds they manage. In a simple model, we show that managers select less risky firms and use more debt financing the higher their ownership. We test these predictions for a sample of PE funds in Norway, where the professionals’ private wealth is public. Consistent with the model, firm risk decreases and leverage increases with the manager’s ownership in the fund, but largely only when scaled with her wealth. Moreover, the higher the ownership, the smaller is each individual investment, increasing fund diversification. Our results suggest that wealth is of first order importance when designing incentive contracts requiring PE fund managers to coinvest.

R&D or R versus D? Firm Innovation Strategy and Equity Ownership

James Driver
,
Texas A&M University
Adam Kolasinski
,
Texas A&M University
Jared Stanfield
,
University of Oklahoma

Abstract

We analyze a unique dataset that separately reports research and development expenditures for a large panel of public and private firms. We establish new empirical facts about how equity ownership status relates to innovation strategy and then compare these facts to equilibrium outcomes predicted by theory. We find public firms have greater research intensity than private firms, inconsistent with theories predicting an equilibrium wherein private firms conduct relatively more exploratory innovation. We also find public firms invest more intensely in innovation of all sorts. These results suggest more innovative firms select into public status, which relaxes financing constraints and provides a more diversified shareholder base more tolerant of high idiosyncratic risk. Reconciling several seemingly conflicting results in prior research, we find private equity held firms, though equally innovative as other private firms, skew their strategies toward development and away from research.

A Theory of Liquidity in Private Equity

Vincent Maurin
,
Stockholm School of Economics
David Robinson
,
Duke University
Per Strömberg
,
Stockholm School of Economics

Abstract

We develop a model of private equity in which many empirical patterns arise endogenously. Our model rests solely on two critical features of this market: moral hazard for General partners (GPs) and illiquidity risk for Limited Partners (LPs). The equilibrium fund structure incentivizes GPs with a share in the fund and compensates LPs with an illiquidity premium. GPs may inefficiently accelerate drawdowns to avoid default by LPs on capital commitments. LPs with higher tolerance to illiquidity then realize higher returns. With a secondary market, return persistence decreases at the GP level but persists at the LP level.

Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis

Emily Johnston-Ross
,
Federal Deposit Insurance Corporation
Song Ma
,
Yale University
Manju Puri
,
Duke University and NBER

Abstract

Using proprietary failed bank acquisition data from the FDIC combined with data on private equity (PE) investors, we investigate PEs’ role in the resolution of failed banks during the crisis. We show PE acquisitions were economically important with PEs acquiring underperforming and riskier failed banks. Our evidence suggests that PEs helped channel capital to failed banks at a time when local banks, the “natural” potential bank acquirers, were themselves distressed. These acquisitions accounted for a quarter of all failed bank assets acquired. Using a quasi-random empirical design to examine ex-post performance and real effects, we find that PE-acquired banks performed better subsequent to the acquisition, and that this, in turn, benefited local economic recovery. Our results suggest that PEs had a positive role in stabilizing the financial system in the crisis through their involvement in failed bank resolution.
Discussant(s)
Bo Becker
,
Stockholm School of Economics, CEPR, and ECGI
Sophie Shive
,
University of Notre Dame
Michael Weisbach
,
Ohio State University
Christa Bouwman
,
Texas A&M University
JEL Classifications
  • G2 - Financial Institutions and Services