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Investing Outside the Box: Evidence from Alternative Vehicles in Private Capital

Author

Listed:
  • Josh Lerner
  • Antoinette Schoar
  • Jason Mao
  • Nan R. Zhang

Abstract

This paper undertakes a comprehensive analysis of alternative investment vehicles in private equity, using unexplored custodial data about 112 limited partners over four decades. We differentiate between alternative vehicles that are GP-directed versus those where the LP has some discretion. Of the roughly 5500 distinct investments made by the LPs in our sample, 32% of investments (17% of capital commitments) were in such alternative vehicles; the allocation increased by more than 10 percentage points over the last decade. Alternative vehicles were far more likely to be offered by larger and North America-based buyout funds. The average performance of these alternative vehicles lagged that of the GPs’ corresponding main funds. The best LP performance was among endowments, private pensions, and insurers. Finally, LPs with better past performance invested in alternative vehicles with better performance, even after conditioning on the GPs’ past records. This result suggests that bargaining between GPs and LPs leads to gradation in investment performance based on the parties’ outside options.

Suggested Citation

  • Josh Lerner & Antoinette Schoar & Jason Mao & Nan R. Zhang, 2018. "Investing Outside the Box: Evidence from Alternative Vehicles in Private Capital," NBER Working Papers 24941, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24941
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    Cited by:

    1. Josh Lerner & Ramana Nanda, 2020. "Venture Capital's Role in Financing Innovation: What We Know and How Much We Still Need to Learn," Journal of Economic Perspectives, American Economic Association, vol. 34(3), pages 237-261, Summer.
    2. William H. Janeway & Ramana Nanda & Matthew Rhodes-Kropf, 2021. "Venture Capital Booms and Start-Up Financing," Annual Review of Financial Economics, Annual Reviews, vol. 13(1), pages 111-127, November.
    3. Begenau, Juliane & Siriwardane, Emil N, 2021. "How do private equity fees vary across public pensions?," CEPR Discussion Papers 15883, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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