Political Connections and Public Pension Fund Investments: Evidence from Private Equity

Abstract

This paper estimates the causal effects of political connections on the investment decisions of public pension funds using granular private equity investment data. By employing a regression discontinuity design in a sample of close U.S. state elections and comparing private equity firms donating to winning candidates with those donating to losing candidates, I find that private equity firms connected to state politicians serving on pension boards experience about 20 times higher probability of receiving investments after the election. These effects are more pronounced for candidates running for elections again in the future and in states with a high corruption index. Turning to real effects, I find that private equity funds invested through political connections underperform by 5% of net internal rate of return. This underperformance is attributed from abnormal fund fees and home-bias investments, which account for 22% and 39% of the documented underperformance, respectively.

Keywords: Public Pension Fund, Private Equity, Political Connections, Corruption

JEL Classification: H55, G11, G18, G23