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The investment behavior of buyout funds: Theory and evidence
Author(s) -
Ljungqvist Alexander,
Richardson Matthew,
Wolfenzon Daniel
Publication year - 2019
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12264
Subject(s) - fund of funds , leveraged buyout , private equity , global assets under management , private equity firm , finance , private equity fund , business , closed end fund , institutional investor , investment (military) , passive management , monetary economics , economics , market liquidity , corporate governance , politics , political science , law
We analyze the determinants of buyout funds’ investment decisions. We argue that when there is imperfect competition for private equity funds, the timing of funds’ investment decisions, their risk‐taking behavior, and their subsequent returns depend on changes in the demand for private equity, conditions in the credit market, and fund managers’ ability to influence perceptions of their talent. We investigate these hypotheses using a proprietary dataset of 207 U.S. buyout funds that invested in 1,957 buyout targets over a 30‐year period. 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 findings are as follows. 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. Finally, following periods of good performance, funds become more conservative, and this effect is stronger for first‐time funds.