Strategic Valuation Management in Private Equity Fundraising

Abstract

This paper investigates the effect of fundraising events on private equity funds self-reported valuations of existing portfolio companies. In the typical private equity fund structure, the general partners (GP) of the funds have both the incentives and the ability to manage their current fund’s track record in order to facilitate fundraising. We show that GPs actively use this ability to manage the valuations of their portfolio companies in practice. For this purpose, we construct a unique dataset containing quarterly valuations for the portfolio companies of a sample of Nordic GPs. Using a matching approach with double treatment, we isolate the fundraising specific valuation effect for Norwegian portfolio companies. We find that this effect materialises through a particular valuation pattern where unrealised returns are shifted in time in order to enable a boost in returns during the run-up to fundraising. This pattern cannot be explained by underlying (good) firm performance.

Keywords: Private Equity, Valuation Management, Fundraising

JEL Classification: G24, M41