The Investment Behavior of Buyout Funds: Theory and Evidence

Alexander Ljungqvist (), Matthew Richardson and Daniel Wolfenzon

No 14180, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper analyzes the determinants of buyout funds' investment decisions. In a model in which the supply of capital is "sticky" in the short run, we link the timing of funds' investment decisions, their risk-taking behavior, and the returns they subsequently earn on their buyouts to changes in the demand for private equity, conditions in the credit market, and funds' ability to influence their perceived talent in the market. Using a proprietary dataset of 207 buyout funds that invested in 2,274 buyout targets over the last two decades, we then investigate the implications of the model. Our dataset contains precisely dated cash inflows and outflows in every portfolio company, links every buyout target to an identifiable buyout fund, and is free from reporting and survivor biases. Thus, we are able to characterize every buyout fund's precise investment choices. Our empirical findings are consistent with the model. First, established funds accelerate their investment flows and earn higher returns when investment opportunities improve, competition for deal flow eases, and credit market conditions loosen. Second, the investment behavior of first-time funds is less sensitive to market conditions. Third, younger funds invest in riskier buyouts, in an effort to establish a track record. Fourth, following periods of good performance, funds become more conservative, and this effect is stronger for younger funds.

JEL-codes: G11 G23 (search for similar items in EconPapers)
Date: 2008-07
New Economics Papers: this item is included in nep-bec
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

Published as Alexander Ljungqvist & Matthew Richardson & Daniel Wolfenzon, 2020. "The investment behavior of buyout funds: Theory and evidence," Financial Management, vol 49(1), pages 3-32.

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Journal Article: The investment behavior of buyout funds: Theory and evidence (2020)
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