Diversification in Private Equity Funds: On Knowledge-sharing, Risk-aversion and Limited-attention
AbstractThis paper examines diversification as a source of value creation and destruction in private equity. The literature has focused on the `diversification discount' in corporations. It has not analyzed diversification in PE-funds, where diversification might increase value by ameliorating managerial risk aversion and by facilitating knowledge sharing. Thus, I examine a sample of 1505 PE-funds to show that industry and geographic diversification increases PE-fund returns on average, this is likely due to knowledge-sharing/learning, and is not due to mere risk-reduction or endogeneity. Diversification can also destroy value if it spreads staff too thinly across industries/regions or is motivated by risk-aversion over performance bonuses.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2011-046.
Date of creation: 2011
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Diversification; Private Equity; Venture Capital;
Find related papers by JEL classification:
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
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