Contracts and Returns in Private Equity Investments

36 Pages Posted: 18 Dec 2009 Last revised: 29 May 2013

See all articles by Stefano Caselli

Stefano Caselli

Bocconi University - Department of Finance

Emilia Garcia-Appendini

University of Zurich - Department of Banking and Finance

Filippo Ippolito

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics; Centre for Economic Policy Research (CEPR)

Date Written: July 18, 2012

Abstract

We analyze the relationship between contracts and returns in private equity (PE) investments. Contractual control in the form of covenants tends to be employed to identify good deals. Better quality firms are more likely to have covenant-rich contracts, as they are less concerned by the constraints imposed by the covenants. PE investors appoint closer associates of the fund in deals that are performing poorly but tend to outsource board governance in better deals. Collectively, our evidence suggests that PE investors operate along two dimensions, choosing covenants and board seats differently, based on the ex-ante quality of the company.

Keywords: private equity funds, venture capital, IRR, covenants, board directors

JEL Classification: G11, G23, G24

Suggested Citation

Caselli, Stefano and Garcia-Appendini, Emilia and Ippolito, Filippo, Contracts and Returns in Private Equity Investments (July 18, 2012). Journal of Financial Intermediation, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1525367 or http://dx.doi.org/10.2139/ssrn.1525367

Stefano Caselli

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Emilia Garcia-Appendini

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Filippo Ippolito (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(+34) 93 542 2578 (Phone)
(+34) 93 542 1746 (Fax)

Barcelona Graduate School of Economics ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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