Spreading Sunshine in Private Equity: Agency Costs and Financial Disintermediation

66 Pages Posted: 22 Sep 2023 Last revised: 2 Apr 2024

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Yingxiang Li

University of British Columbia - Sauder School of Business

Date Written: 03 30, 2024

Abstract

This paper studies the role of regulatory oversight in increasing market transparency and facilitating financial intermediation. I exploit an unanticipated reform that substantially improved the regulatory oversight of private equity (PE) fund advisers. Institutional investors that have more pre-existing relationships with regulated PE fund advisers are less likely to bypass external fund vehicles when investing in private companies. While disintermediation in PE markets allows investors to internalize agency costs associated with intermediation, it could result in capital misallocation. There is little evidence of adverse selection in the deals available to investors, but they tend to finance more mature and larger companies when investing directly, as opposed to investing through PE funds. Overall, regulatory oversight of intermediaries can shape the organizational structure of financial markets through improved incentive alignment with investors.

Keywords: Financial Regulation, Market Organization, Transparency, Asset Management, Investment Advisers, Private Equity

JEL Classification: G23, G24, G28, K22, L22, L51

Suggested Citation

Li, Yingxiang, Spreading Sunshine in Private Equity: Agency Costs and Financial Disintermediation (03 30, 2024). Available at SSRN: https://ssrn.com/abstract=4571392 or http://dx.doi.org/10.2139/ssrn.4571392

Yingxiang Li (Contact Author)

University of British Columbia - Sauder School of Business ( email )

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Vancouver, British Columbia V6T 1Z4
Canada

HOME PAGE: http://www.yingxiang-li.com

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