IDEAS home Printed from https://ideas.repec.org/a/fip/fedder/y1998iqiiip21-34.html
   My bibliography  Save this article

The economics of the private equity market

Author

Listed:
  • Stephen D. Prowse

Abstract

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.

Suggested Citation

  • Stephen D. Prowse, 1998. "The economics of the private equity market," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q III, pages 21-34.
    • Handle: RePEc:fip:fedder:y:1998:i:qiii:p:21-34
    as

    Download full text from publisher

    File URL: https://www.dallasfed.org/~/media/documents/research/er/1998/er9803c.pdf
    File Function: Full Text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Michael C. Jensen, 2010. "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 43-58, January.
    2. Palepu, Krishna G., 1990. "Consequences of leveraged buyouts," Journal of Financial Economics, Elsevier, vol. 27(1), pages 247-262, September.
    3. 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.
    4. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    5. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    6. Lerner, Josh, 1995. "Venture Capitalists and the Oversight of Private Firms," Journal of Finance, American Finance Association, vol. 50(1), pages 301-318, March.
    7. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. den Haan, Wouter J. & Ramey, Garey & Watson, Joel, 2003. "Liquidity flows and fragility of business enterprises," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1215-1241, September.
    2. repec:cdl:ucsdec:99-07r is not listed on IDEAS
    3. Dahiya, Sandeep & Ray, Korok, 2012. "Staged investments in entrepreneurial financing," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1193-1216.
    4. Carolin Bock & Maximilian Schmidt, 2015. "Should I stay, or should I go? – How fund dynamics influence venture capital exit decisions," Review of Financial Economics, John Wiley & Sons, vol. 27(1), pages 68-82, November.
    5. Magnus Henrekson & Dan Johansson & Mikael Stenkula, 2010. "Taxation, Labor Market Policy and High-Impact Entrepreneurship," Journal of Industry, Competition and Trade, Springer, vol. 10(3), pages 275-296, September.
    6. Ebru Z. Boyacıoğlu & Müge Atakan, 2018. "Comparative Review of Socio Economic Levels in Balkan Countries," European Journal of Economics and Business Studies Articles, Revistia Research and Publishing, vol. 4, September.
    7. Leonel Arango Vásquez & Eduardo Alexander Duque Grisales & Germán Horacio Cardona Vélez, 2014. "La teoría de la agencia en la industria del capital riesgo: mecanismos de alineación de intereses," Escenarios: Empresas y Territorio, Institución Universitaria ESUMER, January.
    8. Bock, Carolin & Schmidt, Maximilian, 2015. "Should I stay, or should I go? – How fund dynamics influence venture capital exit decisions," Review of Financial Economics, Elsevier, vol. 27(C), pages 68-82.
    9. repec:cdl:ucsdec:99-07 is not listed on IDEAS
    10. Capasso, Arturo & Faraci, Rosario & Picone, Pasquale Massimo, 2014. "Equity-worthiness and equity-willingness: Key factors in private equity deals," Business Horizons, Elsevier, vol. 57(5), pages 637-645.
    11. Mantell, Edmund H., 2005. "An ergodic theory of venture capital solicitation," International Review of Economics & Finance, Elsevier, vol. 14(2), pages 149-168.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Amina Hamdouni, 2011. "Impact de la syndication sur la performance des entreprises financées par capital-investissement et sur la richesse des parties prenantes," Post-Print hal-00650456, HAL.
    2. Jeppsson, Hans, 2018. "Initial public offerings, subscription precommitments and venture capital participation," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 650-668.
    3. Benson, Bradley W. & Chen, Yu & James, Hui L. & Park, Jung Chul, 2020. "So far away from me: Firm location and the managerial ownership effect on firm value," Journal of Corporate Finance, Elsevier, vol. 64(C).
    4. Annamaria Conti & Jerry Thursby & Marie Thursby, 2013. "Patents as Signals for Startup Financing," Journal of Industrial Economics, Wiley Blackwell, vol. 61(3), pages 592-622, September.
    5. Denis, David J., 2004. "Entrepreneurial finance: an overview of the issues and evidence," Journal of Corporate Finance, Elsevier, vol. 10(2), pages 301-326, March.
    6. Fungáčová, Zuzana & Godlewski, Christophe J. & Weill, Laurent, 2020. "Does the type of debt matter? Stock market perception in Europe," The Quarterly Review of Economics and Finance, Elsevier, vol. 75(C), pages 247-256.
    7. Georg Gebhardt, 2000. "Innovation and Venture Capital," Econometric Society World Congress 2000 Contributed Papers 1404, Econometric Society.
    8. Cuny, Charles J. & Talmor, Eli, 2007. "A theory of private equity turnarounds," Journal of Corporate Finance, Elsevier, vol. 13(4), pages 629-646, September.
    9. James, Hui & Benson, Bradley W. & Wu, Chen (Ken), 2017. "Does CEO ownership affect payout policy? Evidence from using CEO scaled wealth-performance sensitivity," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 328-345.
    10. Harvey, Campbell R. & Lins, Karl V. & Roper, Andrew H., 2004. "The effect of capital structure when expected agency costs are extreme," Journal of Financial Economics, Elsevier, vol. 74(1), pages 3-30, October.
    11. Hall, Bronwyn H. & Lerner, Josh, 2010. "The Financing of R&D and Innovation," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 609-639, Elsevier.
    12. Joseph E. Stiglitz, 1988. "Money, Credit, and Business Fluctuations," The Economic Record, The Economic Society of Australia, vol. 64(4), pages 307-322, December.
    13. Roberta Dessí, 1999. "Financing Entrepreneurs: Optimal Contracts and the Role of Intermediaries," FMG Discussion Papers dp328, Financial Markets Group.
    14. Godlewski, Christophe J., 2014. "Bank loans and borrower value during the global financial crisis: Empirical evidence from France," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 100-130.
    15. 0. De Bandt & B. Camara & P. Pessarossi & M. Rose, 2014. "Does the capital structure affect banks’ profitability? Pre- and post financial crisis evidence from significant banks in France," Débats économiques et financiers 12, Banque de France.
    16. Ulf Axelson & Per Strömberg & Michael S. Weisbach, 2009. "Why Are Buyouts Levered? The Financial Structure of Private Equity Funds," Journal of Finance, American Finance Association, vol. 64(4), pages 1549-1582, August.
    17. Roland Gillet & Hubert De La Bruslerie, 2010. "The Consequences of Issuing Convertible Bonds: Dilution and/or Financial Restructuring?," European Financial Management, European Financial Management Association, vol. 16(4), pages 552-584, September.
    18. Ju-Fang Yen & Chih-Yung Lin & Yan-Shing Chen & Ying-Chen Huang, 2015. "Founding Family Firms and Bank Loan Contracts," Journal of Financial Services Research, Springer;Western Finance Association, vol. 48(1), pages 53-82, August.
    19. Jeng, Leslie A. & Wells, Philippe C., 2000. "The determinants of venture capital funding: evidence across countries," Journal of Corporate Finance, Elsevier, vol. 6(3), pages 241-289, September.
    20. Steven N. Kaplan & Per Strömberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 281-315.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedder:y:1998:i:qiii:p:21-34. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Amy Chapman (email available below). General contact details of provider: https://edirc.repec.org/data/frbdaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.