Working Paper: NBER ID: w24941
Authors: Josh Lerner; Antoinette Schoar; Jason Mao; Nan R. Zhang
Abstract: This paper undertakes a comprehensive analysis of alternative investment vehicles in private equity, using unexplored custodial data about 112 limited partners over four decades. We differentiate between alternative vehicles that are GP-directed versus those where the LP has some discretion. Of the roughly 5500 distinct investments made by the LPs in our sample, 32% of investments (17% of capital commitments) were in such alternative vehicles; the allocation increased by more than 10 percentage points over the last decade. Alternative vehicles were far more likely to be offered by larger and North America-based buyout funds. The average performance of these alternative vehicles lagged that of the GPs’ corresponding main funds. The best LP performance was among endowments, private pensions, and insurers. Finally, LPs with better past performance invested in alternative vehicles with better performance, even after conditioning on the GPs’ past records. This result suggests that bargaining between GPs and LPs leads to gradation in investment performance based on the parties’ outside options.
Keywords: Private Equity; Alternative Investment Vehicles; Limited Partners; General Partners; Performance Analysis
JEL Codes: G1; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| better past performance of LPs (P17) | investment in high-performing alternative vehicles (R42) |
| higher PMEs of LPs (E69) | ability to secure better investment terms (G24) |
| discretionary vehicles outperform GP-directed vehicles (G11) | better returns for top-performing GPs (G11) |
| quality of match between LPs and GPs (C52) | performance of alternative vehicles (Q42) |
| high-performing LPs and GPs (G24) | best outcomes (I14) |
| lower-performing LPs (D29) | inferior outcomes (I14) |