IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/17122.html
   My bibliography  Save this paper

Local Overweighting and Underperformance: Evidence from Limited Partner Private Equity Investments

Author

Listed:
  • Yael V. Hochberg
  • Joshua D. Rauh

Abstract

Institutional investors of all types exhibit substantial home-state bias when investing in private equity (PE) funds. This effect is particularly pronounced for public pension funds, where the local overweighting amounts to 9.7% of the private equity portfolio on average, based on 5-year rolling average benchmarks. Public pension funds' own-state investments perform significantly worse than their out-of-state investments, an average of 3-4 percentage points of net IRR per year, and those that that overweight their portfolios towards home-state investments also perform worse overall. These underperformance patterns are not evident for other types of institutional investors, such as endowments, foundations and corporate pension funds, and we do not observe similar overweighting or underperformance of investments in neighboring states. Overweighting in home state investments by public pension funds is greater in states with higher levels of corruption, although there is no positive correlation of underperformance with corruption for these investors. The overweighting and underperformance of local investments cost public pension funds between $0.9 and $1.2 billion per year, depending on the benchmark.

Suggested Citation

  • Yael V. Hochberg & Joshua D. Rauh, 2011. "Local Overweighting and Underperformance: Evidence from Limited Partner Private Equity Investments," NBER Working Papers 17122, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:17122
    Note: AP CF
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w17122.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Steven N. Kaplan & Antoinette Schoar, 2005. "Private Equity Performance: Returns, Persistence, and Capital Flows," Journal of Finance, American Finance Association, vol. 60(4), pages 1791-1823, August.
    2. Glaeser, Edward L. & Saks, Raven E., 2006. "Corruption in America," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1053-1072, August.
    3. Lerner, Josh & Schoar, Antoinette, 2004. "The illiquidity puzzle: theory and evidence from private equity," Journal of Financial Economics, Elsevier, vol. 72(1), pages 3-40, April.
    4. Coronado, Julie L. & Engen, Eric M. & Knight, Brian, 2003. "Public Funds and Private Capital Markets: The Investment Practices and Performance of State and Local Pension Funds," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(3), pages 579-594, September.
    5. Epstein, Larry G. & Miao, Jianjun, 2003. "A two-person dynamic equilibrium under ambiguity," Journal of Economic Dynamics and Control, Elsevier, vol. 27(7), pages 1253-1288, May.
    6. Baik, Bok & Kang, Jun-Koo & Kim, Jin-Mo, 2010. "Local institutional investors, information asymmetries, and equity returns," Journal of Financial Economics, Elsevier, vol. 97(1), pages 81-106, July.
    7. Steven Kaplan & Antoinette Schoar, 2003. "Private Equity Performance: Returns, Persistence and Capital," NBER Working Papers 9807, National Bureau of Economic Research, Inc.
    8. Josh Lerner & Antoinette Schoar & Wan Wongsunwai, 2007. "Smart Institutions, Foolish Choices: The Limited Partner Performance Puzzle," Journal of Finance, American Finance Association, vol. 62(2), pages 731-764, April.
    9. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-226, May.
    10. John R. Graham & Campbell R. Harvey & Hai Huang, 2009. "Investor Competence, Trading Frequency, and Home Bias," Management Science, INFORMS, vol. 55(7), pages 1094-1106, July.
    11. Norman Strong & Xinzhong Xu, 2003. "Understanding the Equity Home Bias: Evidence from Survey Data," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 307-312, May.
    12. Joshua D. Coval & Tobias J. Moskowitz, 2001. "The Geography of Investment: Informed Trading and Asset Prices," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 811-841, August.
    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. Robert Novy-Marx & Joshua D. Rauh, 2012. "Fiscal Imbalances and Borrowing Costs: Evidence from State Investment Losses," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 182-213, May.
    2. Daniel Shoag, 2013. "Using State Pension Shocks to Estimate Fiscal Multipliers since the Great Recession," American Economic Review, American Economic Association, vol. 103(3), pages 121-124, May.
    3. Fang, Lily & Ivashina, Victoria & Lerner, Josh, 2015. "The disintermediation of financial markets: Direct investing in private equity," Journal of Financial Economics, Elsevier, vol. 116(1), pages 160-178.
    4. Rin, Marco Da & Hellmann, Thomas & Puri, Manju, 2013. "A Survey of Venture Capital Research," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 573-648, Elsevier.
    5. John K. Wald & Hongxian Zhang, 2013. "Corruption, Governance, and Public Pension Funds," Working Papers 0168fin, College of Business, University of Texas at San Antonio.

    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. Eduard Gaar & David Scherer & Dirk Schiereck, 2022. "The home bias and the local bias: A survey," Management Review Quarterly, Springer, vol. 72(1), pages 21-57, February.
    2. Marco Bade & Martin Walther, 2021. "Local preferences and the allocation of attention in equity-based crowdfunding," Review of Managerial Science, Springer, vol. 15(8), pages 2501-2533, November.
    3. Ludovic Phalippou & Oliver Gottschalg, 2009. "The Performance of Private Equity Funds," The Review of Financial Studies, Society for Financial Studies, vol. 22(4), pages 1747-1776, April.
    4. 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.
    5. Lukas Menkhoff & Maik Schmeling & Ulrich Schmidt, 2010. "Are All Professional Investors Sophisticated?," German Economic Review, Verein für Socialpolitik, vol. 11(4), pages 418-440, November.
    6. Martijn Boermans & Ian Cooper & Piet Sercu & Rosanne Vanpée, 2022. "Foreign bias in equity portfolios: Informational advantage or familiarity bias?," Working Papers 742, DNB.
    7. Dlugosch, Dennis & Horn, Kristian & Wang, Mei, 2023. "New experimental evidence on the relationship between home bias, ambiguity aversion and familiarity heuristics," Journal of Economics and Business, Elsevier, vol. 125.
    8. Azzi, Sarah & Suchard, Jo-Ann, 2019. "Crouching tigers, hidden dragons: Private equity fund selection in China," Pacific-Basin Finance Journal, Elsevier, vol. 53(C), pages 236-253.
    9. David C. Ling & Chongyu Wang & Tingyu Zhou, 2021. "The Geography of Real Property Information and Investment: Firm Location, Asset Location and Institutional Ownership," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(1), pages 287-331, March.
    10. Torben Lütje & Lukas Menkhoff, 2007. "What drives home bias? Evidence from fund managers' views," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(1), pages 21-35.
    11. Jennie Bai & Massimo Massa, 2021. "Is Human-Interaction-based Information Substitutable? Evidence from Lockdown," NBER Working Papers 29513, National Bureau of Economic Research, Inc.
    12. H. Henry Cao & Bing Han & David Hirshleifer & Harold H. Zhang, 2011. "Fear of the Unknown: Familiarity and Economic Decisions," Review of Finance, European Finance Association, vol. 15(1), pages 173-206.
    13. Massa, Massimo & Bai, Jennie, 2021. "Is Hard and Soft Information Substitutable? Evidence from the Lockdowns," CEPR Discussion Papers 15744, C.E.P.R. Discussion Papers.
    14. Andrew Metrick & Ayako Yasuda, 2011. "Venture Capital and Other Private Equity: a Survey," European Financial Management, European Financial Management Association, vol. 17(4), pages 619-654, September.
    15. Josh Lerner & Antoinette Schoar & Wan Wongsunwai, 2007. "Smart Institutions, Foolish Choices: The Limited Partner Performance Puzzle," Journal of Finance, American Finance Association, vol. 62(2), pages 731-764, April.
    16. Lerner, Josh & Mao, Jason & Schoar, Antoinette & Zhang, Nan R., 2022. "Investing outside the box: Evidence from alternative vehicles in private equity," Journal of Financial Economics, Elsevier, vol. 143(1), pages 359-380.
    17. Nicolas Coeurdacier & Hélène Rey, 2013. "Home Bias in Open Economy Financial Macroeconomics," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 63-115, March.
    18. Fang, Lily & Ivashina, Victoria & Lerner, Josh, 2015. "The disintermediation of financial markets: Direct investing in private equity," Journal of Financial Economics, Elsevier, vol. 116(1), pages 160-178.
    19. Møller, Stig V. & Nørholm, Henrik & Rangvid, Jesper, 2014. "Consumer confidence or the business cycle: What matters more for European expected returns?," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 230-248.
    20. repec:hal:spmain:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    21. Groh, Alexander P. & Liechtenstein, Heinrich & Canela, Miguel A., 2008. "Limited partners' perceptions of the Central Eastern European venture capital and private equity market," IESE Research Papers D/727, IESE Business School.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

    Statistics

    Access and download statistics

    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:nbr:nberwo:17122. 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: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.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.