Are LPs Funds of Funds? Relationship Building in the Private Equity Industry

44 Pages Posted: 2 Mar 2015

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Hong Zhang

Tsinghua University - PBC School of Finance

Xiaolan Zhou

Shanghai University of Finance and Economics - School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 2015

Abstract

We investigate an informal yet important mechanism in the private equity industry that helps to reduce uncertainty: relationship building. Based on a large sample of private equity funds over the 1980-2010 period, we find that the general partners strategically allocate good funds to loyal investors, who in turn commit to invest also in new funds that are not ex-ante promising. In addition, this effect is stronger for venture capital (VC) funds and more popular among certain types of investors. The bargaining power of the relationship concentrates in the hand of GPs.

Keywords: Performance, Private Equity, Relationship

JEL Classification: G20, L10

Suggested Citation

Massa, Massimo and Zhang, Hong and Zhou, Xiaolan, Are LPs Funds of Funds? Relationship Building in the Private Equity Industry (March 2015). CEPR Discussion Paper No. DP10448. Available at SSRN: https://ssrn.com/abstract=2572426

Massimo Massa (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Hong Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

HOME PAGE: http://eng.pbcsf.tsinghua.edu.cn/content/details167_7995_x.html

Xiaolan Zhou

Shanghai University of Finance and Economics - School of Economics ( email )

777 Guoding Road
Shanghai, 200433
China

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