Investing Outside the Box: Evidence from Alternative Vehicles in Private Capital

67 Pages Posted: 13 Aug 2018 Last revised: 6 Sep 2018

Josh Lerner

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Jason Mao

State Street Corporate

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Nan R. Zhang

State Street Global Exchange

Multiple version iconThere are 2 versions of this paper

Date Written: August 15, 2018

Abstract

This paper undertakes a comprehensive analysis of alternative investment vehicles in private equity, using unexplored custodial data about 112 limited partners over four decades. We differentiate between alternative vehicles that are GP-directed versus those where the LP has some discretion. Of the roughly 5500 distinct investments made by the LPs in our sample, 32% of investments (17% of capital commitments) were in such alternative vehicles; the allocation increased by more than 10 percentage points over the last decade. Alternative vehicles were far more likely to be offered by larger and North America-based buyout funds. The average performance of these alternative vehicles lagged that of the GPs’ corresponding main funds. The best LP performance was among endowments, private pensions, and insurers. Finally, LPs with better past performance invested in alternative vehicles with better performance, even after conditioning on the GPs’ past records. This result suggests that bargaining between GPs and LPs leads to gradation in investment performance based on the parties’ outside options.

Suggested Citation

Lerner, Josh and Mao, Jason and Schoar, Antoinette and Zhang, Nan R., Investing Outside the Box: Evidence from Alternative Vehicles in Private Capital (August 15, 2018). Harvard Business School Entrepreneurial Management Working Paper No. 19-012; Harvard Business School Finance Working Paper No. 19-012. Available at SSRN: https://ssrn.com/abstract=3230145

Josh Lerner (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6065 (Phone)
617-496-7357 (Fax)

HOME PAGE: http://www.people.hbs.edu/jlerner/

Harvard University - Entrepreneurial Management Unit

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jason Mao

State Street Corporate ( email )

1 Lincoln Street
Boston, MA 02111
United States

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

50 Memorial Drive, E52-447
Cambridge, MA 02142
United States
617-253-3763 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nan R. Zhang

State Street Global Exchange ( email )

1 Lincoln Street
Boston, MA 02110
United States

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