Essays in Private Equity: Developments from Limited Partners and General Partners

Abstract

This thesis studies Private Equity (PE), with a focus on recent developments by market participants aimed at addressing new issues and existing problems facing a mature, competitive industry from the perspective of PE investors (Limited Partners (LPs)) and managers (General Partners (GPs)).

The first study investigates the value that private market financial intermediaries offer LPs through Funds of Funds (FoFs). This value proposition differs between primary FoFs who invest in new private capital funds undergoing fundraising, and secondary FoFs who invest in mature fund interests sold by LPs. Secondary FoFs circumvent the illiquidity feature of PE investing and have superior performance compared to primary FoFs. There is no evidence to suggest that certain LPs are better FoF investors than others, but investments in FoFs can help LPs learn how to make future private market investments.

The second study analyses infrastructure investment through a PE structure. PE investment in infrastructure is a recent phenomenon, allowing institutional investors to receive exposure to infrastructure without requiring direct investments. This has led to increasingly international investment from US and UK managers to the rest of the world in assets that are generally regarded as mature, physically asset intensive and providing essential services. This cross-border activity results in the flow of funds which are affected by asset, country and investor characteristics. Mechanism typically used by PE managers are not as effective when used for infrastructure investments, likely due to the lower degrees of information asymmetry and moral hazard when compared with venture capital and buyout transactions.

The third study evaluates one way in which operating partners have become key components of investment strategy for many PE managers by focusing on their appointment to board level positions and evaluating their impact on investee success. Operating partners are more likely to be appointed to the board of the investee when deals are completed in a recessionary and uncertain environment. While the appointment of operating partners to the board generally does not have a significant impact on exit success, operating partners may add value in specialised sectors such as energy.

This thesis contributes to the literature on PE and alternative investments. The findings have significant implications for PE investors and managers.