An analysis of private equity funds: an investor's perspective

Abstract

This dissertation provides a detailed exploration of private equity (PE) funds from the perspective of investors. The PE asset class has experienced tremendous growth over the past few decades and is now a significant mainstay in the portfolios of many institutional investors. This dissertation examines both the unlisted and listed PE markets and the influence of information asymmetries on investor preferences and outcomes.

The first study investigates the drivers and performance implications of investor demand in PE funds. Investor demand is proxied by PE fund oversubscription, calculated as the commitments raised by a PE fund relative to the target fund size. The results indicate that PE funds are more likely to be oversubscribed when investors perceive macroeconomic conditions at the time of fundraising to be conducive to the investment strategy. Additionally, investors are found to exhibit fund selection abilities in the buyout space but not in the venture sub-asset class in which information asymmetries are more pronounced.

The second study employs a new dataset to examine the decisions and performance of local and foreign investors investing in China-focused PE funds. The Chinese market provides a unique setting for this study because it can be viewed as a quasi-segmented market due to information constraints and legal barriers. The results show that foreigners are more likely to seek fund characteristics that lessen their information asymmetry and provide additional diversification. Moreover, there is evidence that domestic-backed PE funds exit a greater number of portfolio companies and secure higher returns on exit relative to foreign-backed funds.

The third study evaluates the announcement returns and liquidity effects of investment and exit announcements made by listed PE entities. Using an international sample, the analysis finds that both types of announcements result in wealth gains to shareholders. Liquidity, as measured by trading volume and the Amihud illiquidity ratio, increases significantly on days surrounding these announcements. Additionally, a listed PE entity’s stage focus, financing style, and organizational form are shown to affect announcement returns and stock liquidity.

This dissertation contributes to the literature on PE, investor decisions, and information asymmetry. The findings have significant implications for both PE investors and fund managers.