The Disintermediation of Financial Markets: Direct Investing in Private Equity
One of the important issues in corporate finance is the rationale for and role of financial intermediaries. In the private equity setting, institutional investors are increasingly eschewing intermediaries in favor of direct investments. To understand the trade-offs in this setting, we compile a proprietary dataset of direct investments from seven large institutional investors. We find that solo investments by institutions outperform co-investments and a wide range of benchmarks for traditional private equity partnership investments. The outperformance is driven by deals where informational problems are not too severe, such as more proximate transactions to the investor and later-stage deals, and by an ability to avoid the deleterious effects on returns often seen in periods with large inflows into the private equity market. The poor performance of co-investments, on the other hand, appears to result from fund managers' selective offering of large deals to institutions for co-investing.
We thank a number of institutional investors for making this analysis possible by generously sharing their data and answering our many follow-on questions. We thank Jean-Nöel Barrot (discussant), Ludovic Phalippou, Per Strömberg and participants at the New York Fed/NYU Conference on Private Equity, the University of Chicago, the Greenwich Roundtable, and the London Business School Private Equity Symposium for their insightful comments. Lilei Xu and Chris Allen provided remarkable assistance with the analysis. We thank Per Strömberg and Rudiger Stücke for access to unpublished data. Harvard Business School's Division of Research provided financial support. A number of the authors has advised institutional investors in private equity funds, private equity groups, and governments designing policies relevant to private equity. All errors and omissions are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Journal of Financial Economics Volume 116, Issue 1, April 2015, Pages 160–178 Cover image The disintermediation of financial markets: Direct investing in private equity ☆ Lily Fanga, Victoria Ivashinab, c, , , Josh Lernerb, c