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The Disintermediation of Financial Markets: Direct Investing in Private Equity

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  • Lily Fang
  • Victoria Ivashina
  • Josh Lerner

Abstract

One of the important issues in corporate finance is the rationale for and role of financial intermediaries. In the private equity setting, institutional investors are increasingly eschewing intermediaries in favor of direct investments. To understand the trade-offs in this setting, we compile a proprietary dataset of direct investments from seven large institutional investors. We find that solo investments by institutions outperform co-investments and a wide range of benchmarks for traditional private equity partnership investments. The outperformance is driven by deals where informational problems are not too severe, such as more proximate transactions to the investor and later-stage deals, and by an ability to avoid the deleterious effects on returns often seen in periods with large inflows into the private equity market. The poor performance of co-investments, on the other hand, appears to result from fund managers’ selective offering of large deals to institutions for co-investing.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19299.

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Date of creation: Aug 2013
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Handle: RePEc:nbr:nberwo:19299

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  1. Yuk-Shee Chan., 1982. "On the Positive Role of Financial Intermediation in Allocation of Venture Capital in a Market with Imperfect Information," Research Program in Finance Working Papers, University of California at Berkeley 127, University of California at Berkeley.
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