Comparing Capital Allocation Efficiency in Public and Private Equity Markets

Abstract

Investors increasingly allocate capital outside of public equity markets through private equity investments. We evaluate capital allocation efficiency across equity market segments by comparing the marginal revenue and innovation products of capital in firms receiving equity. We find that traditional private market segments---early-stage deals and deals led by traditional VCs---allocate capital as efficiently as public markets. However, private markets' expansion into late-stage deals and those involving non-traditional investors exhibit substantially lower allocation efficiency. Differences in information efficiency and investor expertise across market segments explain these patterns. Our study highlights the growth implications of the rise in both late-stage private financing and private deal-making by non-traditional investors.

Keywords: Capital allocation, stock markets, private equity, venture capital, growth equity, information efficiency, Governance, Late-stage financing

JEL Classification: D24, E22, G14, G24, G32, G34, O16, O47