Racial diversity in private capital fundraising
with Josh Lerner and Emmanuel Yimfor
R&R Journal of Financial Economics

Why do Black- and Hispanic-owned (B&H) investment firms manage less than 2% of private capital assets? This paper reveals a striking pattern: while these firms raise 40% less capital in their first fund, they are more likely to raise follow-up funds once established. Using three distinct changes to investor preferences, including the implementation of emerging manager programs, which benefit established but not first-time B&H managers, we show that investor preferences rather than ability differences alone drive these patterns. This asymmetric lifecycle pattern suggests that screening costs, rather than taste-based discrimination or pure statistical discrimination, perpetuate minority underrepresentation in asset management.

Board diversity in private vs. public firms
with James Weston and Emmanuel Yimfor

What drives racial diversity on startup boards? We provide the first evidence on this question by exploiting the demand shock from the 2020 George Floyd protests. Using facial recognition technology to measure race, we find that Black director appointments nearly doubled (from 1.6% to 3.1%) in the year following the protests. Access to diverse candidates shaped startups' ability to respond: appointments increased most in areas with more Black professionals and in executive and independent director roles, while venture capital firms showed no increase in Black appointees. Capital market incentives drove these responses: startups planning to raise capital in public or private markets were three times more likely to add Black directors. Rather than competing for the same directors, public firms expanded the candidate pool, increasingly appointing first-time directors. Despite the sudden increase in demand, Black directors had comparable qualifications to other directors, and startups adding Black directors showed no change in performance. Our findings reveal that concentrated ownership, combined with institutional constraints, can entrench traditional networks that limit board diversity.

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.

Carried interest
In: Cumming, D., Hammer, B. (eds) The Palgrave Encyclopedia of Private Equity. Palgrave Macmillan, Cham. 2023. https://doi.org/10.1007/978-3-030-38738-9_58-2