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Diversification in Private Equity Funds: On Knowledge-sharing, Risk-aversion and Limited-attention

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  • Humphery-Jenner, M.

    (Tilburg University, Center for Economic Research)

Abstract

This 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 Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2011-046.

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Date of creation: 2011
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Handle: RePEc:dgr:kubcen:2011046

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Web page: http://center.uvt.nl

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Keywords: Diversification; Private Equity; Venture Capital;

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References

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  1. Murillo Campello & John Graham & Campbell R. Harvey, 2009. "The Real Effects of Financial Constraints: Evidence from a Financial Crisis," NBER Working Papers 15552, National Bureau of Economic Research, Inc.
  2. Kandel, Eugene & Leshchinskii, Dima & Yuklea, Harry, 2011. "VC Funds: Aging Brings Myopia," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(02), pages 431-457, April.
  3. Alexander Ljungqvist & Matthew Richardson, 2003. "The cash flow, return and risk characteristics of private equity," NBER Working Papers 9454, National Bureau of Economic Research, Inc.
  4. Dittmar, Amy & Mahrt-Smith, Jan & Servaes, Henri, 2002. "Corporate Liquidity," CEPR Discussion Papers 3499, C.E.P.R. Discussion Papers.
  5. Cumming, Douglas & Dai, Na, 2011. "Fund size, limited attention and valuation of venture capital backed firms," Journal of Empirical Finance, Elsevier, vol. 18(1), pages 2-15, January.
  6. Chan, Yuk-Shee & Siegel, Daniel R & Thakor, Anjan V, 1990. "Learning, Corporate Control and Performance Requirements in Venture Capital Contracts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 365-81, May.
  7. Matsusaka, John G. & Nanda, Vikram, 2002. "Internal Capital Markets and Corporate Refocusing," Journal of Financial Intermediation, Elsevier, vol. 11(2), pages 176-211, April.
  8. Yael V. Hochberg & Alexander Ljungqvist & Yang Lu, 2007. "Whom You Know Matters: Venture Capital Networks and Investment Performance," Journal of Finance, American Finance Association, vol. 62(1), pages 251-301, 02.
  9. April Knill, 2009. "Should Venture Capitalists Put All Their Eggs in One Basket? Diversification versus Pure-Play Strategies in Venture Capital," Financial Management, Financial Management Association International, vol. 38(3), pages 441-486, 09.
  10. Demiroglu, Cem & James, Christopher M., 2010. "The role of private equity group reputation in LBO financing," Journal of Financial Economics, Elsevier, vol. 96(2), pages 306-330, May.
  11. Douglas Cumming & Uwe Walz, 2010. "Private equity returns and disclosure around the world," Journal of International Business Studies, Palgrave Macmillan, vol. 41(4), pages 727-754, May.
  12. Humphery-Jenner, Mark L. & Powell, Ronan G., 2011. "Firm size, takeover profitability, and the effectiveness of the market for corporate control: Does the absence of anti-takeover provisions make a difference?," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 418-437, June.
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Cited by:
  1. Schwienbacher, Armin, 2013. "The entrepreneur's investor choice: The impact on later-stage firm development," Journal of Business Venturing, Elsevier, vol. 28(4), pages 528-545.

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