TY - JOUR AU - Ljungqvist,Alexander AU - Richardson,Matthew AU - Wolfenzon,Daniel TI - The Investment Behavior of Buyout Funds: Theory and Evidence JF - National Bureau of Economic Research Working Paper Series VL - No. 14180 PY - 2008 Y2 - July 2008 UR - http://www.nber.org/papers/w14180 L1 - http://www.nber.org/papers/w14180.pdf N1 - Author contact info: Alexander Ljungqvist Stern School of Business New York University 44 West Fourth Street, #9-160 New York, NY 10012 Tel: 212/998-0304 Fax: 212/995-4220 E-Mail: aljungqv@stern.nyu.edu Matthew P. Richardson Stern School of Business New York University 44 West 4th Street, Suite 9-190 New York, NY 10012 Tel: 212/998-0349 Fax: 212/995-4233 E-Mail: mrichar0@stern.nyu.edu Daniel Wolfenzon Graduate School of Business Columbia University Uris Hall, Room 808 3022 Broadway New York, NY 10027 Tel: 212/998-0309 Fax: 212/995-4233 E-Mail: dw2382@columbia.edu M3 - presented at "New World of Private Equity Conference", April 4-5, 2008 AB - 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. ER -