Spreading Sunshine in Private Equity: Agency Costs and Financial Disintermediation

66 Pages Posted: 22 Sep 2023 Last revised: 16 May 2024

See all articles by Yingxiang Li

Yingxiang Li

University of British Columbia - Sauder School of Business

Date Written: May 16, 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 expanded the regulatory oversight of private equity (PE) fund advisers, which reduces the information asymmetry faced by investors. 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 mitigate 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, larger, and less innovative companies when investing directly, as opposed to investing through PE funds. Overall, my findings highlight the limits of market-based governance in PE funds and the positive role of regulatory intervention in shaping the organizational structure of PE markets.

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 (May 16, 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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HOME PAGE: http://www.yingxiang-li.com

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