RESEARCH OVERVIEW

My research focuses on the asymmetric information problem between investors and fund managers in the Private Equity industry, by evaluating several sources of the problem, and potential tools that institutional investors might be taking advantage of, to alleviate the information asymmetry.

In my Job Market Paper, "In Pursuit Of Information: Information Asymmetry in Private Equity Commitments", I assess three potential tools that institutional investors might use during the fund selection process to access information; investment consultants, trustee experience and herding. I show that private equity specialist consultants add value to the fund selection process, trustee experience is negatively related to the reliance on consultants, and investors follow each others' investment decisions.

In "Systematic Biases in Private Equity Returns", we challenge the use of IRR to assess fund performance by providing evidence that it is a systematically biased performance metric, misinforming the investors about their private equity investment performance.

In "Fair Value Measurement and Private Equity Fund Interim Valuations", I evaluate how the accuracy of the interim asset valuations of fund managers that are provided to the investors, which is the only information that the investors can gather regarding how their investments perform during the fund life, are affected by fair value measurement.

WORKING PAPERS

In Pursuit Of Information: Information Asymmetry in Private Equity Commitments (Job Market Paper)

Winner of the best short presentation award at Bayes Business School PhD Research Days, 2021

Private Equity ("PE") investors are exposed to asymmetric information during their fund manager selection process. This paper evaluates several ways public pension funds ("PF"), the largest capital provider to PE funds, deal with this information asymmetry. Investors with specialist PE consultants are more willing to invest in PE funds with limited available information, and they achieve better investment performance. PFs with experienced trustees need less support from consultants and perform better in internally-driven fund manager selections. Additionally, investors exhibit herd behaviour in their fund manager selection. A strong informational signal by a PF about a PE fund attracts others to invest in the same fund. Herd behaviour increases under lower information availability and when the source of the informational signal is a more credible investor.

[SSRN Link]

[3-minutes Presentation]

Systematic Biases in Private Equity Returns (with Simon Hayley)

Private Equity (PE) has grown into a substantial asset class, but there remain major problems with measuring PE fund returns. Investors continue to use the internal rate of return (IRR) as a key measure of fund performance. It is well known that early returns of cash can have a substantial impact on fund IRRs, but the magnitude and causes of this effect have not previously been systematically analysed. We demonstrate that the IRR is affected by two systematic biases: a convexity bias, and a “quit-whilst-ahead” bias arising because the returns on PE projects tend to covary with their durations. Both bias the IRRs of PE funds upwards. Using a range of parametric and non-parametric estimation techniques, we show that these biases boost fund IRRs by between 2 and 4% per annum ─ a very significant proportion of the average net PE fund IRR (around 12% per annum). Fund cash multiples and PMEs become similarly biased if they are annualized to try to make them comparable with other assets. We further demonstrate that alternative performance measures which have been suggested by practitioners are also biased, which confirms how poorly understood these effects are. Failure to take proper account of these biases is likely to lead investors into badly misinformed investment decisions.

[SSRN Link]

Fair Value Measurement and Private Equity Fund Interim Valuations

Private equity investors require accurate estimates for the market value of their investments to perform optimal fund allocations and correctly diversify their portfolios. Since private equity investments are mostly privately held and do not have an active market valuation, these estimates rely on the subjective valuations of the fund managers. Previous research documents inaccurate valuations that lag behind the real intrinsic values of the investments. This paper shows that adopting fair value accounting increases the accuracy of the interim fund valuations of buyout funds significantly. This increase is not temporary, is accompanied by the increased valuation effort of the private equity funds and is robust to the possible confounding effects of the global financial crisis. Beneficial effects of local fair value measurement standards spill over to the funds in other geographies, mainly due to peer pressure effect. Fair value measurement eliminates the significant heterogeneity in valuation quality stemming from the difference in fund investor profiles.

[SSRN Link]