Institutional investments in private equity funds: social ties and the reduction of information asymmetry

Markus Freiburg and Dietmar Grichnik

Venture Capital, 2011, vol. 14, issue 1, 1-26

Abstract: The reduction of information asymmetry between institutional investors and private equity (PE) firms is one of the key challenges for the successful fundraising of PE funds in an increasingly competitive market. Social ties provide a potential mechanism to reduce information asymmetry. Therefore, this paper investigates the role of social ties for institutional investments in PE funds. Based on our fieldwork and a data set of 136 institutional investors and PE firms in Germany, we show that both direct and indirect social ties influence the investment decisions of institutional investors for PE firms. This influence is not restricted to functions of information transfer but also includes mechanisms of trust building. Interestingly, direct and indirect ties reveal different effects. Direct ties transfer information and increase goodwill trust. Indirect ties also transfer information but show no effect on trust building. Our results suggest that social ties can reduce information asymmetry between institutional investors and PE firms and thereby help to establish a financing relationship.

Date: 2011
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DOI: 10.1080/13691066.2011.642147

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