Publications:
1. Paying for Performance in Private Equity: Evidence from Management Contracts (with David Robinson, Soenke Sievers and Thomas Hartmann-Wendels) (Management Science 66, 1756-1782, Link to Paper) (April, 2020)
Abstract:
We offer the first empirical analysis connecting the timing of general partner (GP) compensation to private equity fund performance. Using detailed information on limited partnership agreements between private equity limited and general partners, we find that "GP-friendly'' contracts -agreements that pay general partners on a deal-by-deal basis instead of withholding carried interest until a benchmark return has been earned- are associated with higher returns, both gross and net of fees. This is robust to measures of performance persistence, time period effects, and other contract terms, and is related to exit-timing incentives. Timing practices balance GP incentives against limited partner downside protection.
Presentations:
San Francisco Private Capital Symposium (2016); LBS Finance Seminar (2016) (presentation by co-author); European Finance Association (2015); American Finance Association (2013); Caltech/USC Private Equity Conference (2015) (presentation by co-author); University of Maryland Finance Seminar (2015) (presentation by co-author); MIT Sloan Finance Seminar (2014) (presentation by co-author); UNC, 5th Annual Conference on Private Equity Research (2014) (presentation by co-author); Brown Bag Seminar in Economics, Center for Macroeconomic Research, University of Cologne (2014); Duke University, Fuqua School of Business (2013) (presentation by co-author); Department of Banking and Finance, University of Cologne (2012)
2. Do Private Equity Managers Raise Funds on (Sur)real Returns? Evidence from deal-level data
(Journal of Financial and Quantitative Analysis, 1-34. doi:10.1017/S0022109022000990, Link to Paper) (September, 2022)
Abstract:
Recent studies on agency problems in private equity have fueled the suspicion that fund managers strategically manipulate performance estimates around fundraising times. While these studies rely on aggregated portfolio data, this paper offers the first empirical analysis of "window dressing'' in private equity based on quarterly reported deal-level performance. In contrast to previous findings of a smoking gun at the fund level, I do not find any evidence of inflated performance at the deal level. Observed interim peaks in valuation at the fund level result from lower returns on deals made under pressure to invest unspent capital closer to fundraising.
Presentations:
Conference on Entrepreneurial Financial Management at ESMT Berlin (2017); Conference on Entrepreneurial Financial Management at ESMT Berlin (2017); European Finance Association (2016); UNC Private Equity Research Consortium Conference (2016); Indiana University Finance Seminar (2016); Erasmus University Rotterdam Finance Seminar (2016); University of Nebraska Finance Seminar (2016); Southern Methodist University Finance Seminar (2016); Duke University, Finance Brown Bag (2015)
3. General Partner Compensation
(In: Cumming, D, Hammer, B. (eds) The Palgrave Encyclopedia of Private Equity, Palgrave Macmillan, Cham. 2023)
4. A Practical, Boring and Potentially Effective Strategy For Reducing Gun Violence,
(with David Robinson) (NC Newsline, September 2023)
Working papers:
1. More Guns Lead to More Crime: Evidence from Private Equity Deals (Link to paper)
Abstract:
Using private equity (PE) deals in gun retail chains and comparing individual stores within a county and year, I study if higher gun supply due to profit maximization motives leads to higher crime. I create a granular and novel dataset that matches guns used in crime to firearms licensed stores (FFLs) to parent retail chains to investors. I find that PE-backed FFLs sell more guns traced to homicides, assaults, and robberies. PE-backed dealer stores are less likely to be inspected and are more likely to see an increase in gun law violations. I conduct various robustness tests to argue for the use of PE deals as a gun supply shock. My findings indicate that cost-saving strategies and weak gun law enforcement result in marginal gun sales to criminals as opposed to law abiding citizens.
Presentations:
NBER Economics of Firearm Markets, Crime and Gun Violence (2024), Midwest Economics Association (2024), Boca-ECGI Corporate Finance and Governance Conference (2023)
2. Justice Good As Random? (Previous Titel: Are Judges Randomly Assigned to Chapter 11 Bankruptcies? Not According to Hedge Funds) (with Kristoph Kleiner)
(Conditional Accept at Journal of Finance, Link to paper)
Abstract:
Analyzing 2010-2020 U.S. corporate bankruptcies, we find judicial assignment is not random, but predicted by hedge funds. In our setting, judges decide whether to convert Chapter 11 bankruptcies to liquidation, reducing unsecured creditor recovery. Relative to secured hedge funds, unsecured hedge fund creditors are assigned judges with lower past conversion rates and higher unsecured creditor recovery rates. Effects are greatest when hedge funds hold connections with the debtor’s board or invested recently. Explaining these findings, we show judges are not assigned consecutive large cases, leading to predictability. Exploiting this pattern, we develop a novel recentered instrumental variable for causal identification.
Presentations:
Bretton Woods Accounting and Finance Conference (2023), AFA Meetings (2023) (presentation by co-author), Paris Winter Finance Conference (2022), Northern Finance Association Meetings (2022), Rice University (2022), Paris Winter Finance Conference (2022), Arizona State University (2022) (presentation by co-author), Indiana University Finance Seminar (2022) (presentation by co-author), IWH-FIN-FIRE Workshop on “Challenges to Financial Stability” (2022), Indiana University Business Law Seminar (2022) (presentation by co-author), Florida State University SunTrust Finance Conference (2022) (presentation by co-author), University of Connecticut Finance Conference (2022) (presentation by co-author), NBER Corporate Finance (2022) (presentation by co-author), University of Texas AIM Investment Conference (2022) (presentation by co-author), MoFir Banking Workshop (2022) (presentation by co-author), Wharton Seminar on Corporate Financial Distress and Restructuring (2022) (presentation by co-author), University of Dayton (2022) (presentation by co-author), Arizona State University (2022) (presentation by co-author), Wabash Finance Conference (2022)
3. Credit Market Equivalents and the Valuation of Private Firms (with Lukas Schmid and Roberto Steri) (Revise and Resubmit at Review of Financial Studies, Link to Paper)
Abstract:
We propose to value private equity investments by credit market equivalents (CME). Our method relies on the observation that many portfolio companies held by private equity funds have loans and bonds traded in secondary markets. We exploit the market valuations embedded in these prices by constructing a stochastic discount factor that prices loan and bond returns of private equity portfolios. To that end, we construct a dataset that carefully matches loan and bond price data with a proprietary data on cash flows of private equity companies at the portfolio company level. With our credit market implied stochastic discount factor, we can value the cash flows of the private equity companies to derive their CME valuation. Using machine learning variable selection techniques, we identify a five-factor model for credit market returns. Our method works as long as credit and private equity markets are sufficiently integrated, for which we provide supportive empirical evidence.
Presentations:
NBER Long-Term Asset Management (2023), Financial Economics Research Annual Conference at Reichman University (2023), Midwestern Finance Annual Meeting (2023), ITAM Finance Conference (2023), University of Copenhagen (2022) (presentation by co-author), University of Münster (2022) (presentation by co-author), WashU St. Louis Annual Conference on Corporate Finance (2022), 14th Annual Private Equity Research Symposium (2022), Stockholm School of Economics (2022), Penn State (2022), Tsinghua University (2022), EFA 2022, Cavalcade (2022), FIRS (2021), Western Finance Association (2020); PERC Oxford Symposium (2020, postponed); Duke/UNC Asset Pricing/Entrepreneurship Conference (2020, postponed); UNC Junior Finance Conference (2020, postponed); Southern California Private Equity Conference (2020); Financial Markets and Corporate Decisions Conference in Stockholm (2019) (presentation by co-author)
4. Why Are Private Equity Funds Investing in Publicly Traded Stocks? (with YoungJun Song)
Abstract:
Contrary to the name “private” equity, we show that nearly two-thirds of private equity funds invest in publicly traded companies which remain publicly traded throughout their holding period. We study two explanations for why buyout fund managers make these investments. First, we hypothesize that investments in publicly traded stocks provide an efficient solution to the informational problem in fundraising and net asset value (NAV) lending. Using deal-level data of private equity funds, we show that investments in publicly traded stocks are typically made pre-fundraising, in funds using more debt, display observable abnormal returns at announcement as high as realized returns of private holdings, positively affect fundraising outcomes, and do not increase the return volatility of the overall private equity fund’s portfolio. We find no support for the alternative that agency conflicts between fund managers and investors motivate these investments. Our analysis provides new evidence of how private equity funds can achieve NAV debt financing despite staleness of NAVs of their private holdings.
Presentations:
Chicago Entrepreneurship Workshop (2024), Financial Management Association Annual Meeting (2024), Boca Raton Corporate Finance Conference (2024)
5. Is the Whole Greater Than the Sum of Its Parts? Behavioral Effects of Compensation in Private Equity
Abstract:
This paper examines effort and risk-taking incentive effects to a risk-averse private equity fund manager for a deal-by-deal compensation in comparison to a whole-fund compensation. I show that a deal-by-deal carried interest scheme leads to a higher optimal effort and controllable risk level as opposed to a whole-fund distribution, even compared to an increase in carried interest percentage. These results hold for a venture capital but not for a buyout type fund. The factor of critical importance for my findings is the heterogeneity in portfolio investments' exit times, holding times and outcomes. The model predictions are consistent with the evidence of Hüther et. al. (2014) as well as Robinson and Sensoy (2013) and have broader implications for delegated asset management.
Presentations:
Financial Management Association International Annual Meeting (2014), Department of Banking and Finance, University of Cologne (2014)
Abstract:
This paper analyzes the relation of expected performance-based and fixed compensation in private equity as a function of the investor's contract. A higher variable to fixed compensation may be a way of allowing fund managers of imperfectly observed quality to signal their ability. According to the learning framework, variable to fixed compensation should be lower if there is higher uncertainty about the manager's ability. We use a proprietary and hand-collected dataset that contains information on compensation from limited partnership agreements. Equipped with the actual contract terms that can be linked to various fund managers and fund characteristics, we use the model of Metrick and Yasuda (2010), and its extension form Choi et al. (2011) to estimate the expected variable and fixed manager compensation. We find that both expected variable and fixed compensation increase as a result of the manager's bargaining power. Consistent with the learning framework, a decrease in uncertainty about the manager's ability is associated with higher expected variable compensation.
Work in Progress: