Intermediation in Private Equity: The Role of Placement Agents

Abstract

Intermediation in private equity involves illiquid investments, professional investors, and high information asymmetry. We use this unique setting to empirically evaluate theoretical predictions regarding intermediation. Placement agent usage has become nearly ubiquitous, but agents are associated with significantly lower abnormal returns in the cross-section. However, returns are higher for funds employing a top-tier agent, and for first-time funds employing an agent. We also find evidence that agents may mitigate investment risk. Our results provide support for both the certification and influence peddling roles of intermediaries discussed in theoretical literature, suggesting heterogeneous motives for intermediation in the private equity industry.

Keywords: certification, reputation, financial literacy, sophisticated investors

JEL Classification: G11, G20, G23, G24