Coinvestment and risk taking in private equity funds

  • Private equity fund managers are typically required to invest their own money alongside the fund. We examine how this coinvestment affects the acquisition strategy of leveraged buyout funds. In a simple model, where the investment and capital structure decisions are made simultaneously, we show that a higher coinvestment induces managers to chose less risky firms and use more leverage. We test these predictions in a unique sample of private equity investments in Norway, where the fund manager's taxable wealth is publicly available. Consistent with the model, portfolio company risk decreases and leverage ratios increase with the coinvestment fraction of the manager's wealth. Moreover, funds requiring a relatively high coinvestment tend to spread its capital over a larger number of portfolio firms, consistent with a more conservative investment policy.

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Author:Carsten Bienz, Karin S. Thorburn, Uwe WalzORCiDGND
Parent Title (English):SAFE working paper series ; No. 126
Series (Serial Number):SAFE working paper (126)
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2016
Year of first Publication:2016
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2016/04/12
Tag:Private equity; coinvestment; incentives; leveraged buyouts; risk taking; wealth
Issue:January 25, 2016
Page Number:40
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht