The Investment Behavior of Buyout Funds: Theory and Evidence

43 Pages Posted: 21 Jul 2008 Last revised: 1 Oct 2022

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Swedish House of Finance; European Corporate Governance Institute (ECGI)

Matthew P. Richardson

Department of Finance, Leonard N. Stern School of Business, New York University

Daniel Wolfenzon

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: July 2008

Abstract

This paper analyzes the determinants of buyout funds' investment decisions. In a model in which the supply of capital is "sticky" in the short run, we link the timing of funds' investment decisions, their risk-taking behavior, and the returns they subsequently earn on their buyouts to changes in the demand for private equity, conditions in the credit market, and funds' ability to influence their perceived talent in the market. Using a proprietary dataset of 207 buyout funds that invested in 2,274 buyout targets over the last two decades, we then investigate the implications of the model. Our dataset contains precisely dated cash inflows and outflows in every portfolio company, links every buyout target to an identifiable buyout fund, and is free from reporting and survivor biases. Thus, we are able to characterize every buyout fund's precise investment choices. Our empirical findings are consistent with the model. First, established funds accelerate their investment flows and earn higher returns when investment opportunities improve, competition for deal flow eases, and credit market conditions loosen. Second, the investment behavior of first-time funds is less sensitive to market conditions. Third, younger funds invest in riskier buyouts, in an effort to establish a track record. Fourth, following periods of good performance, funds become more conservative, and this effect is stronger for younger funds.

Suggested Citation

Ljungqvist, Alexander and Ljungqvist, Alexander and Richardson, Matthew P. and Wolfenzon, Daniel, The Investment Behavior of Buyout Funds: Theory and Evidence (July 2008). NBER Working Paper No. w14180, Available at SSRN: https://ssrn.com/abstract=1165508

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Matthew P. Richardson (Contact Author)

Department of Finance, Leonard N. Stern School of Business, New York University ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
+1 (212) 998-0349 (Phone)
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Daniel Wolfenzon

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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