Working Paper: NBER ID: w14861
Authors: Shai Bernstein; Josh Lerner; Antoinette Schoar
Abstract: This paper examines the direct private equity investment strategies across sovereign wealth funds and their relationship to the funds' organizational structures. SWFs seem to engage in a form of trend chasing, since they are more likely to invest at home when domestic equity prices are higher, and invest abroad when foreign prices are higher. Funds see the industry P/E ratios of their home investments drop in the year after the investment, while they have a positive change in the year after their investments abroad. SWFs where politicians are involved have a much greater likelihood of investing at home than those where external managers are involved. At the same time, SWFs with external managers tend to invest in lower P/E industries, which see an increase in the P/E ratios in the year after the investment. By way of contrast, funds with politicians involved invest in higher P/E industries, which have a negative valuation change in the year after the investment.
Keywords: No keywords provided
JEL Codes: G23; G24; H11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic equity prices (G12) | SWF investment likelihood at home (G59) |
| Foreign equity prices (G12) | SWF investment likelihood abroad (F21) |
| Governance structure (politician involvement) (G38) | SWF investment likelihood domestically (F21) |
| Governance structure (external managers) (G34) | SWF investment in lower PE industries (G31) |
| Investment in lower PE industries (G31) | PE ratios post-investment (G31) |
| Governance structure (politician involvement) (G38) | SWF investment in higher PE industries (G29) |
| SWF investment in higher PE industries (G29) | Valuation change (D46) |
| High levels of home investment by politician-influenced funds (G23) | Poorer performance due to agency problems (G34) |