Download This PaperA Theory of Liquidity in Private Equity
Swedish House of Finance Research Paper No. 20-8
Proceedings of Paris December 2020 Finance Meeting EUROFIDAI - ESSEC
60 Pages Posted: 25 Feb 2020 Last revised: 15 Oct 2020
Date Written: August 10, 2020
Abstract
We develop a model of private equity in which many empirical patterns arise endogenously. Our model rests solely on two critical features of this market: moral hazard for General partners (GPs) and illiquidity risk for Limited Partners (LPs). The equilibrium fund structure incentivizes GPs with a share in the fund and compensates LPs with an illiquidity premium. GPs may inefficiently accelerate drawdowns to avoid default by LPs on capital commitments. LPs with higher tolerance to illiquidity then realize higher returns. With a secondary market, return persistence decreases at the GP level but persists at the LP level.
Keywords: Private Equity, Fund Structure, Return Persistence, Liquidity Premium, Secondary Markets
JEL Classification: G11, G23, G30
Suggested Citation: Suggested Citation
David T. Robinson
Fuqua School of Business, Duke University ( email )
100 Fuqua Drive
Durham, NC 27708-0120
United States
919-660-8023 (Phone)
Duke Innovation & Entrepreneurship Initiative ( email )
215 Morris St., Suite 300
Durham, NC 27701
United States
ECGI ( email )
c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium
HOME PAGE: http://https://www.hhs.se/en/houseoffinance/about/people/people-container/per-stromberg/