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Essays in Private Equity

Sefiloglu, O. (2023). Essays in Private Equity. (Unpublished Doctoral thesis, City, University of London)


The private equity industry has witnessed significant growth during the last two decades, fuelled by the increasing demand by institutional investors. Meanwhile, as the industry matured and competition among fund managers increased, attractive early returns disappeared, and performance persistence diminished, increasing the difficulty of private equity fund manager selection. Moreover, fund managers are better informed about their own quality compared to the potential investors, which constitutes an information asymmetry and exacerbates the difficulty of finding the right fund manager.

This thesis explores the information asymmetry in the private equity industry and its effects on investor behaviour. Chapter 1 evaluates several ways public pension funds (“PPF”) deal with this information asymmetry. I show that fund selections driven by specialist investment consultants overperform. PPFs 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 PPF 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 PPF.

In Chapter 2, we challenge the use of the internal rate of return (“IRR”) as the main performance measurement tool for private equity funds, and we demonstrate that the IRR is affected by two biases: a convexity bias, and a “quit-whilst-ahead” bias arising because the returns on PE projects tend to covary with their durations. Using a range of parametric and non-parametric estimation techniques, we show that these biases boost fund IRRs by an average of around 3% per annum - a significant proportion of the average net PE fund IRR (around 12% per annum). These results suggest that IRRs misguide investors during the asset allocation andfund selection processes.

In Chapter 3, I assess the quality of the information provided by the fund managers to their investors. I show that adopting fair value accounting increases the accuracy of the interim fund valuations of buyout funds significantly. This increase 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 other geographies, mainly due to the peer pressure effect. Fair value measurement eliminates the significant heterogeneity in valuation quality from the difference in fund investor profiles.

Publication Type: Thesis (Doctoral)
Subjects: H Social Sciences > HG Finance
H Social Sciences > HJ Public Finance
Departments: Bayes Business School
Bayes Business School > Bayes Business School Doctoral Theses
Doctoral Theses
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