Racial diversity in private capital fundraising
with Josh Lerner and Emmanuel Yimfor
Black- and Hispanic-owned funds control a very modest share of assets in the private capital industry. We find that the sensitivity of follow-on fundraising to fund performance is greater for minority-owned groups, particularly for underperforming groups. We find little support for a number of explanations for these patterns: that minority fund valuations are overstated, that minority funds encounter difficulties in hiring personnel, or that deploying capital is more difficult for these funds. We do find that the ability of minority groups to raise capital increases during periods of high racial awareness and when the chief investment officer of local public pension plans and endowments are minorities. Together, the results support the hypothesis that the modest representation of Black- and Hispanic-owned firms in private capital stems at least partially from the nature of investor demand, rather than the supply of fund managers.
Board diversity in private vs. public firms
with James Weston and Emmanuel Yimfor
We test whether differences in ownership structure influence race and gender diversity in corporate boards. We find that privately-owned, venture-backed companies appoint a lower proportion of minorities and women to their boards compared to publicly traded firms. After the George Floyd Social Justice Movements of 2020, the racial diversity gap in appointments widened significantly from 7 to 30 percentage points, as private firms responded less to social and media pressure to diversify. The lack of diversity in venture-capital (VC) backed private firms is persistent and remains following firms' IPO, leading to a diversity gap between VC- and non-VC-backed public firms. Our study, which uses image recognition techniques combined with extensive manual review to build the first large database of board diversity in VC-backed private firms, highlights the influence of both venture capitalists and public shareholders on board composition.
The dynamics of pay-for-performance sensitivity in private equity funds
I explore the dynamics of pay-for-performance sensitivity in private equity funds. Carried interest gives private equity fund managers 20% of fund profits, conditional on beating a hurdle rate. Consequently, early deal successes (failures) put the fund in (out of) the carry, making pay for performance close to 20 cents on the dollar (zero). I document that companies acquired in buyouts grow faster when acquired by funds that have a higher pay-for-performance sensitivity. The effect is stronger when explicit incentives are expected to be more important. I find similar results using exogenous variation in pay-for-performance sensitivity due to public market movements. My findings provide evidence of the importance of incentives for value creation in private equity.
Managerial ownership and firm performance: Evidence from private equity
I examine the relationship between managerial ownership and operational performance for firms acquired in a buyout. I show that high post-buyout CEO ownership stakes are associated with improved firm profitability. This result is economically stronger for changes in ownership stakes, and is solely present when the CEO is retained. Ownership stakes are higher when initial profitability is low and is associated with cost cutting. Overall, the results support the view that improving managerial incentives is an important part of value creation in buyouts.
Liquidity provision in the secondary market for private equity fund stakes
with Rui Albuquerque, Ludovic Phalippou, and Enrique Schroth
We estimate the demand for private equity fund stakes in the secondary market using a broker's proprietary data on bids. We show that the demand response to aggregate liquidity shocks is negatively related to contemporaneous bids, and this relationship is stronger for funds that most likely are put for sale in times of low liquidity. We also show that the demand response to aggregate liquidity shocks is unrelated to future NAV-to-NAV returns and to future bidding behaviour. These results are consistent with the variation in discounts in private equity stakes being linked to the variation in liquidity provision in the secondary market for private equity.
Work in progress
The dark side of private equity: Defaults following buyouts