Coinvestment and Risk Taking in Private Equity Funds

Abstract

[evdate 2014-12-04] IAS Conference on Entrepreneurship and Finance. Talk no.4 Title from event program.

'IAS Conference on Entrepreneurship and Finance, paper presentation I.'

IAS Conference on Entrepreneurship and Finance, held 4 Dec., 2014, at the Hong Kong University of Science and Technology. Sponsor, HKUST Jockey Club Institute for Advanced Study, and co-sponsor by Center for Asian Financial Markets, Department of Finance, HKUST.

Abstract: Private equity fund managers are typically required to invest in the portfolio companies alongside the fund. We examine how this coinvestment affects the investment strategy of leveraged buyout funds. In a simple model where the investment and capital structure decisions are made simultaneously, we show that a higher coinvestment induces managers to choose less risky firms and use more leverage. We test these predictions in a unique sample of private equity investments in Norway, where the fund managers' taxable wealth is public information. Consistent with the model, the interest coverage and leverage ratios of portfolio companies increase with the coinvestment fraction of the manager's wealth. Moreover, funds requiring a relatively high coinvestment tend to spread its capital over a larger number of portfolio firms and realize lower returns -- From Norwegian School of Economics Web page

Duration: 30 min.