Are Novice Private Equity Funds Risk-Takers? Evidence from a Comparison with Established Funds

40 Pages Posted: 5 Nov 2012 Last revised: 20 Feb 2015

See all articles by Pierre Giot

Pierre Giot

Facult├ęs Universitaires Notre-Dame de la Paix (FUNDP)

Ulrich Hege

Toulouse School of Economics; European Corporate Governance Institute (ECGI)

Armin Schwienbacher

SKEMA Business School

Date Written: February 14, 2014

Abstract

This paper explores whether private equity firms that are new to the industry take excessive risks relative to funds from established firms. We use differences between the implicit incentives of managers of experienced and of novice funds as identification strategy. We find that novice funds invest more slowly than experienced funds, contradicting the risk-taking hypothesis. However, the size of their investments, in value and as fraction of fund size, is larger; this could be consistent with risk-shifting by novice funds but also with alternative hypotheses. We find that the size difference increases over time and is absent from buyout investments. We also find that novice funds tend to underperform most dramatically for early large investments, and that the size of their investments increases after a first successful exit. These and other findings are in conflict with the excessive risk-taking hypothesis, but largely consistent with alternative explanations that emphasize differences in expertise.

Keywords: private equity funds, venture capital, buyouts, learning, reputation, risk-taking.

JEL Classification: G24, G34

Suggested Citation

Giot, Pierre and Hege, Ulrich and Schwienbacher, Armin, Are Novice Private Equity Funds Risk-Takers? Evidence from a Comparison with Established Funds (February 14, 2014). 29th International Conference of the French Finance Association (AFFI) 2012; Journal of Corporate Finance, Vol. 27, No. 55-71, 2014. Available at SSRN: https://ssrn.com/abstract=2084269 or http://dx.doi.org/10.2139/ssrn.2084269

Pierre Giot (Contact Author)

Facult├ęs Universitaires Notre-Dame de la Paix (FUNDP) ( email )

Rempart de la Vierge 8
B-5000 Namur
Belgium

Ulrich Hege

Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France
+33 5 61 12 86 01 (Phone)

HOME PAGE: http://https://www.tse-fr.eu/people/ulrich-hege

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

Armin Schwienbacher

SKEMA Business School ( email )

Avenue Willy Brandt
Euralille, 59777
France

HOME PAGE: http://sites.google.com/view/armin-schwienbacher

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