Agency costs of dry powder in LBO funds

peer reviewe

Agency costs of dry powder in LBO funds

peer reviewe

Does Syndication With Local Venture Capitalists Moderate the Effects of Geographical and Institutional Distance?

Venture capitalists (VCs) face additional risks and costs when they invest in firms located in geographically remote countries or in countries whose institutions differ substantially from those in their home countries. Our study considers foreign VCs' prospect of overcoming these investment obstacles as a rationale for syndicating with local VCs from the investment countries. Through such syndication, foreign VCs may obtain easier access to investment opportunities, improve the risk allocation and face lower information costs. Using a novel dataset of worldwide deals, we draw a diametrically opposed picture for the two kinds of distance: our results lend support to the conjecture that the obstacles of great institutional distance cannot be overcome with the help of a local VC, whereas those of great geographical distance can. (C) 2014 Elsevier Inc. All rights reserved

What lures cross-border venture capital inflows?

We investigate if economic factors drive gross and net cross-border venture capital inflows differently. Using a dataset of venture capital investments in European and North American countries from 2000 to 2008, we find that higher expected economic growth goes hand in hand with higher gross as well as net inflows, while higher market capitalization and a more favorable environment for venture capital intermediation entail higher gross inflows, but lower net inflows. The latter two findings may suggest that cross-border venture capital inflows partly compensate for potential limits in domestic venture capital supply. However, the findings may also reflect that venture capitalists' locational decisions depend on the viability of capital markets. (C) 2012 Elsevier Ltd. All rights reserved

Agency costs of dry powder in private equity funds

The amount of non-invested capital in the private equity industry or “dry powder” has raised numerous concerns from public opinion. To obtain insight about the drivers of the dry powder development, we model the investment behavior of a fund sponsor as a function of their expected fees, the latter being a function of their expected returns as well as their profit-sharing agreement with limited partners (LP). Our empirical analysis is performed on 383 funds sponsoring 1,011 US LBO deals over the period 1980 – 2019. We first show that, consistently with the model, the fund management fees, the change in the fee basis computation towards the end of the investment period and the general partner’s (GP) expected return based on their track record and experience have a significant impact on the dry powder of the fund. Small funds, funds with low management fees or GP with a weak track record are more likely to have an abnormal level of dry powder at the end of the investing period. This situation leads to agency costs as we give evidence of the loss in performance for funds with abnormal dry powder at the end of the investing period. We find that high levels of dry powder lead to investment distortions where GPs focus more on maximizing their fees rather than maximizing the value for LPs. Deals undertaken at the end of the investing period by funds with a large volume of dry powder are under-leveraged, are larger and performed with less syndication to maximize the equity spent. They also present a significant lower cash on cash return. Key words: Dry powder, agency costs, private equity, LBO, investment distortion