Money Chasing Deals?: The Impact of Fund Inflows on Private Equity Valuations

Abstract

This paper examines the positive impact of the inflows of capital into venture funds on the valuations of their investments in firms and two potential explanations for the relationship. Growth in venture capital commitments is shown to increase the valuation of new investments. This effect is robust to (i) the addition of controls for firm characteristics, public market valuations, and various alternative hypotheses, (ii) an examination of first differences, and (iii) the use of inflows into leveraged buyout funds as an instrumental variable. Interaction terms suggest that the impact of venture capital inflows on prices is greatest in states with the most venture capital activity. Changes in valuations do not appear related to the ultimate success of these firms. The findings are consistent with suggestions that competition for a limited number of good investments may be responsible for rising prices.

See also my related papers "Venture Capital and Private Equity: A Course Overview", "What Drives Venture Capital Fundraising?", and "Conflict of Interest and Reputation in the Issuance of Public Securities: Evidence from Venture Capital".

JEL Classification: G23