A Theory of Liquidity in Private Equity

60 Pages Posted: 25 Feb 2020 Last revised: 3 Mar 2020

See all articles by Vincent Maurin

Vincent Maurin

Swedish House of Finance

David T. Robinson

Fuqua School of Business, Duke University; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Per Strömberg

Swedish House of Finance

Date Written: January 1, 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

Maurin, Vincent and Robinson, David T. and Stromberg, Per, A Theory of Liquidity in Private Equity (January 1, 2020). Swedish House of Finance Research Paper No. 20-8. Available at SSRN: https://ssrn.com/abstract=3527298 or http://dx.doi.org/10.2139/ssrn.3527298

Vincent Maurin (Contact Author)

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

David T. Robinson

Fuqua School of Business, Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0120
United States
919-660-8023 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Per Stromberg

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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