Adverse Selection and the Performance of Private Equity Co-Investments
52 Pages Posted: 19 Nov 2016 Last revised: 15 Dec 2018
Date Written: December 14, 2018
Investors increasingly look for private equity managers to provide opportunities for co-investing outside the fund structure, thereby saving fees and carried interest payments. In this paper we use a large sample of buyout and venture capital co-investments to test how such deals compare with the remaining fund investments. In contrast to Fang, Ivashina and Lerner (2015) we find no evidence of adverse selection. Gross return distributions of co-investments and other deals are similar. Co-investments generally have lower costs to investors. We simulate net returns to investors and demonstrate how reasonably sized portfolios of co-investments significantly out-perform fund returns.
Keywords: Private equity, financial intermediation, co-investment, adverse selection
JEL Classification: G23, G24
Suggested Citation: Suggested Citation