The Investment Behavior of Buyout Funds: Theory and Evidence

Alexander Ljungqvist, Matthew Richardson, Daniel Wolfenzon

NBER Working Paper No. 14180
Issued in July 2008
NBER Program(s):   CF

This paper analyzes the determinants of buyout funds' investment decisions. In a model in which the supply of capital is "sticky" in the short run, we link the timing of funds' investment decisions, their risk-taking behavior, and the returns they subsequently earn on their buyouts to changes in the demand for private equity, conditions in the credit market, and funds' ability to influence their perceived talent in the market. Using a proprietary dataset of 207 buyout funds that invested in 2,274 buyout targets over the last two decades, we then investigate the implications of the model. Our dataset contains precisely dated cash inflows and outflows in every portfolio company, links every buyout target to an identifiable buyout fund, and is free from reporting and survivor biases. Thus, we are able to characterize every buyout fund's precise investment choices. Our empirical findings are consistent with the model. First, established funds accelerate their investment flows and earn higher returns when investment opportunities improve, competition for deal flow eases, and credit market conditions loosen. Second, the investment behavior of first-time funds is less sensitive to market conditions. Third, younger funds invest in riskier buyouts, in an effort to establish a track record. Fourth, following periods of good performance, funds become more conservative, and this effect is stronger for younger funds.

download in pdf format
   (253 K)

email paper

This paper is available as PDF (253 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14180

Users who downloaded this paper also downloaded these:
Ljungqvist and Richardson w9454 The cash flow, return and risk characteristics of private equity
Kaplan and Stromberg w14207 Leveraged Buyouts and Private Equity
Bernstein, Lerner, Sorensen, and Stromberg w15632 Private Equity and Industry Performance
Axelson, Stromberg, and Weisbach w12826 Why are Buyouts Levered: The Financial Structure of Private Equity Funds
Axelson, Jenkinson, Stromberg, and Weisbach w15952 Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us