Essays in private equity

This dissertation presents three empirical analyses on private equity (PE) investments. The first chapter, The accuracy of net asset values in private equity: Evidence from the secondary market, examines pricing in the secondary market for PE fund stakes. The average transaction occurs at a discount, which is commonly attributed to compensation for liquidity provision. As a quarter of bids come in at a par or a premium, this cannot be the full explanation. I document that cross-sectional variation in discounts predicts future fund returns. The second chapter explores The dynamics of pay-for-performance sensitivity in private equity funds arising from carried interest. As carried interest is conditional on beating a hurdle rate, pay-for-performance sensitivity is increasing in fund performance, and increasingly so as the fund matures. I document that within-fund variation in pay-for-performance sensitivity is positively related to growth in portfolio companies acquired in buyouts. The effect is stronger when the importance of the direct component is high relative to the indirect component of pay for performance. To rule out confounding factors, I utilize public market movements to generate exogenous variation in the measure. My findings provide evidence of the importance of incentives for value creation. The third chapter, Managerial ownership and operational improvements in buyouts, investigates the relevance of CEO ownership stakes in companies acquired in buyouts. I find that post-buyout CEO equity ownership stakes are positively associated with profitability improvements. Consistent with an effect of incentives, the results are stronger when the ownership stake increases, and are driven entirely by the subsample in which the CEO is retained. Taken together, these three studies contribute to the growing body of work on private equity investments and the impact of private equity ownership on companies acquired in buyouts. They open the door to further theoretical and empirical research in the field.