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The economics of the private equity market

  • Stephen D. Prowse
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    The private equity market is an important source of funds for start-ups, private middle-market companies, firms in financial distress, and public firms seeking buyout financing. Over the past fifteen years, it has been the fastest growing corporate finance market, far surpassing the public equity and public and private bond markets. In this article, Stephen Prowse examines the economic foundations of the private equity market and describes its institutional structure. He also explores reasons for the market's explosive growth and highlights the main characteristics of that growth, including data on returns to private equity investors. He describes the important investors, intermediaries, and issuers in the market and their interactions with each other. In particular, he investigates how the major intermediary in the market--the limited partnership--addresses the severe information problems associated with investing in small private firms.

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    File URL: http://www.dallasfed.org/assets/documents/research/er/1998/er9803c.pdf
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    Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

    Volume (Year): (1998)
    Issue (Month): Q III ()
    Pages: 21-34

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    Handle: RePEc:fip:fedder:y:1998:i:qiii:p:21-34
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    1. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
    2. Jensen, Michael C, 1993. " The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Finance, American Finance Association, vol. 48(3), pages 831-80, July.
    3. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
    4. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    5. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
    6. Palepu, Krishna G., 1990. "Consequences of leveraged buyouts," Journal of Financial Economics, Elsevier, vol. 27(1), pages 247-262, September.
    7. Lerner, Josh, 1995. " Venture Capitalists and the Oversight of Private Firms," Journal of Finance, American Finance Association, vol. 50(1), pages 301-18, March.
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