The Disintermediation of Financial Markets: Direct Investing in Private Equity
Lily H. Fang
INSEAD - Finance
Harvard University; National Bureau of Economic Research (NBER)
Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)
June 30, 2013
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.
Number of Pages in PDF File: 51
Keywords: Financial Intermediation, Private Equity, Direct Investment, Co-investment
JEL Classification: G20, G23working papers series
Date posted: October 9, 2012 ; Last revised: July 1, 2013
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