Venturing into racial diversity on startup boards
with James Weston and Emmanuel Yimfor
Management Science (accepted)

Social movements have reshaped public company governance, but far less is known about whether they influence private companies. Following the 2020 George Floyd (GF) protests, Black director appointments at VC-backed startups nearly doubled, from 1.6% to 3.1%, concentrated among outsider and insider directors, the roles with broader candidate pools, rather than investor directors. Using a novel dataset, we provide the first large-scale evidence on racial diversity among startup directors and show that startups interacting with capital markets or located in areas with intense protests responded more. Despite the increase, GF-era Black startup directors had observable qualifications comparable to those of pre-GF appointees, and early evidence suggests no career headwinds, whereas public firms sharply increased their reliance on first-time directors, who later struggled to obtain additional board seats. Taken together, these findings suggest that social movements can influence governance well before firms enter public markets, with capital market interactions providing an important transmission channel.

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

Black- and Hispanic-owned (B&H) groups managed only 3.5% of U.S. private capital funds raised between 2015 and 2020. We follow B&H managers through the fundraising lifecycle to understand where gaps emerge. At entry, first-time B&H VC funds raise 31 to 47% less capital than comparable non-B&H funds. First-time B&H PE funds show no comparable fundraising shortfall. Once a first fund is raised, B&H PE managers are, if anything, more likely to raise follow-on funds conditional on performance. B&H funds underperform on average, but not among first-time VC funds, where fundraising gaps are concentrated. Evidence on later-stage LP allocations points to non-pecuniary preferences among some LPs. Public pensions are substantially more likely to invest in B&H funds, whose relative performance declines with government representation on pension boards, while B&H fundraising rises after George Floyd's murder before partially reversing amid the anti-DEI backlash. A simple model, in which B&H GPs' first funds may be too small for LPs with non-pecuniary preferences, reconciles these facts. Funding gaps for B&H GPs likely have downstream consequences for entrepreneurs: B&H managers are 20 percentage points more likely to back B&H founders.

Secondary Markets for VC-Backed Startup Equity
with Daniel Bias and Berk Sensoy

This paper provides the first systematic evidence on secondary markets for equity in VC-backed startups, a fast-growing segment of private capital markets. Using proprietary data from a large intermediary, we show that shares typically trade at a discount to prior venture capital valuations, with discounts narrowing when buyer demand is strong. We find that market activity responds to new information: in an event study, order flow and prices react quickly to VC financing events. Furthermore, secondary prices are forward-looking and predict future VC valuations. These signals are partially incorporated by mutual funds valuing their startup holdings. By providing both liquidity and price discovery, secondary markets are becoming an integral part of private capital markets, and their importance is likely to grow as startups remain private longer.

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