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)
January 13, 2014
This is the first large-sample study of direct private equity investments by institutional investors. The analysis uses a proprietary dataset of all such investments by seven large institutional investors over twenty years. Despite the substantial fee discounts, we find little evidence of attractive relative performance by direct investments. In particular, co-investments underperform traditional fund investments: this poor performance appears to result from fund managers’ selective offering of deals at market peaks as co-investments. While some solo direct investments outperform fund investments, this is concentrated in the earlier part of the sample and less information-sensitive transactions. The performance of both co-investments and solo investments deteriorates sharply in the 2000s, suggesting that any information advantage may have disappeared as the private equity industry became more competitive. Overall, our evidence suggests that institutional investors may find it difficult to capture the rents earned by private equity managers by investing directly.
Number of Pages in PDF File: 52
Keywords: Financial Intermediation, Private Equity, Direct Investment, Co-investment
JEL Classification: G20, G23working papers series
Date posted: October 9, 2012 ; Last revised: January 15, 2014
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