Desperate Capital Breeds Productivity Loss: Evidence from Public Pension Investments in Private Equity

105 Pages Posted: 13 Dec 2022

See all articles by Vrinda Mittal

Vrinda Mittal

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Date Written: November 22, 2022

Abstract

I study the effects of private equity (PE) buyouts on labor productivity using a novel micro-data on investments in PE funds and PE buyout deals, combined with confidential Census data. I show that while PE increased productivity at target firms until 2011, it substantially decreased productivity post 2011. In the time series, the decrease in labor productivity is correlated with an increase in capital from the most underfunded public pensions. In the cross-section, I show that firms financed predominantly by the most underfunded public pensions experience a -5.2% annual change in labor productivity, as compared to firms financed by other investors which experience a +5.2% annual change. Firms supported by low quality PE funds face productivity decreases. The key mechanism is the notion of desperate capital, where the most underfunded public pensions allocate capital to low quality GPs, and realize lower PE returns. I introduce a novel instrument of public unionization rates to establish support for underfunded positions causing selection into low quality GPs, which ultimately leads to capital misallocation within private markets.

Keywords: Private equity, labor productivity, public pension funds

JEL Classification: G2, G11, J24

Suggested Citation

Mittal, Vrinda, Desperate Capital Breeds Productivity Loss: Evidence from Public Pension Investments in Private Equity (November 22, 2022). Available at SSRN: https://ssrn.com/abstract=4283853 or http://dx.doi.org/10.2139/ssrn.4283853

Vrinda Mittal (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://https://www.vrindamittal.com

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