Working Paper: NBER ID: w19299
Authors: Lily Fang; Victoria Ivashina; Josh Lerner
Abstract: One of the important issues in corporate finance is the rationale for and role of financial intermediaries. In the private equity setting, institutional investors are increasingly eschewing intermediaries in favor of direct investments. To understand the trade-offs in this setting, we compile a proprietary dataset of direct investments from seven large institutional investors. We find that solo investments by institutions outperform co-investments and a wide range of benchmarks for traditional private equity partnership investments. The outperformance is driven by deals where informational problems are not too severe, such as more proximate transactions to the investor and later-stage deals, and by an ability to avoid the deleterious effects on returns often seen in periods with large inflows into the private equity market. The poor performance of co-investments, on the other hand, appears to result from fund managers' selective offering of large deals to institutions for co-investing.
Keywords: Private Equity; Direct Investing; Financial Intermediation
JEL Codes: G0; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| type of investment (solo) (G11) | performance outcomes (TVPI, IRR) (G11) |
| type of investment (coinvestment) (G11) | performance outcomes (TVPI, IRR) (G11) |
| informational problems (D83) | performance outcomes (solo investments) (G11) |
| informational problems (D83) | performance outcomes (coinvestments) (G11) |
| market conditions (P42) | performance outcomes (coinvestments) (G11) |
| market conditions (P42) | performance outcomes (solo investments) (G11) |
| agency problems (G34) | performance outcomes (coinvestments) (G11) |