Optimal investment of private equity

Yang Liu and Jinqiang Yang

Finance Research Letters, 2015, vol. 14, issue C, 76-86

Abstract: We investigate the implications of illiquidity and compensation structure on the investment decision of Private Equity (PE). We use a real option model to capture the optimal entry of PE investment for the risk-averse investors, and it shows that the illiquidity has ambiguous effects on the investment hurdle. Different from the economic implications of standard real option, our model shows that high illiquidity may accelerate or delay the investment decision. Management fees or carried interest will induce under-investment of PE. Moreover, our theoretical predictions are supported by the empirical evidence.

Keywords: Real option; Private equity; Illiquidity; Compensation structure (search for similar items in EconPapers)
JEL-codes: C61 G11 G23 G31 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1544612315000574
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:14:y:2015:i:c:p:76-86

DOI: 10.1016/j.frl.2015.05.013

Access Statistics for this article

Finance Research Letters is currently edited by R. Gençay

More articles in Finance Research Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().