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

57 Pages Posted: 8 Feb 1998  

Paul A. Gompers

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Josh Lerner

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Date Written: January 1998

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

Suggested Citation

Gompers, Paul A. and Lerner, Josh, Money Chasing Deals?: The Impact of Fund Inflows on Private Equity Valuations (January 1998). Available at SSRN: https://ssrn.com/abstract=57964 or http://dx.doi.org/10.2139/ssrn.57964

Paul A. Gompers

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6297 (Phone)
617-496-8443 (Fax)

Harvard University - Entrepreneurial Management Unit ( email )

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Josh Lerner (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6065 (Phone)
617-496-7357 (Fax)

HOME PAGE: http://www.people.hbs.edu/jlerner/

Harvard University - Entrepreneurial Management Unit

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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