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International Private Equity Valuation and Disclosure

Northwestern Journal of International Law and Business, 2009

35 Pages Posted: 16 Apr 2009  

Douglas J. Cumming

York University - Schulich School of Business

Andrej Gill

Goethe University Frankfurt - Faculty of Economics and Business Administration

Uwe Walz

Goethe University Frankfurt - Institute of Economics; Center For Financial Studies (CFS); Goethe University Frankfurt - Research Center SAFE

Date Written: April 5, 2009

Abstract

Private equity ("PE") firms are financial intermediaries standing between the portfolio firms and their investors. They are typically organized as closed-end funds aiming to overcome informational asymmetries and to exploit specialization gains in selecting and overseeing portfolio firms. However, their existence as financial intermediaries creates new informational asymmetries (with respect to the investors in the PE funds). Fund managers raise follow-on funds before exiting their investments, and may have incentives to overvalue their as-yet-unsold investments when making disclosures to institutional investors. Despite strong incentives to overvalue, PE funds do not face mandatory disclosure rules in any country with a significant PE industry. Yet the overvaluation of unexited PE investments has the potential to distort capital allocations to the PE industry generally, and across PE funds in different countries around the world. Disclosure of performance to the investor is burdened by two main difficulties. On the one hand, valuation requires sufficient information on the performance of the firm whereas on the other hand, even if sufficient information is available, PE firms may disclose information strategically. The main aim of this Article is to discuss these two issues in detail.

Keywords: Private Equity, Valuation, Disclosure, Returns, Regulation, Law and Finance

JEL Classification: G24, G28, G31, G32, G35

Suggested Citation

Cumming, Douglas J. and Gill, Andrej and Walz, Uwe, International Private Equity Valuation and Disclosure (April 5, 2009). Northwestern Journal of International Law and Business, 2009. Available at SSRN: https://ssrn.com/abstract=1373609

Douglas J. Cumming

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Andrej Gill

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Grüneburgplatz 1
Frankfurt am Main, D-60323
Germany

Uwe Walz (Contact Author)

Goethe University Frankfurt - Institute of Economics ( email )

Postfach 81
D-60054 Frankfurt
Germany

Center For Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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