eThesis - School of Business electronic theses

PURPOSE OF THE STUDY This thesis studies private equity (PE) funds and decision making within those funds. A number of studies compare PE to public equity and the academic literature has evolved to explain performance by fund characteristics, fund investors’ level of sophistication and economic conditions. However, the understanding of how existing funds invest, exit and perform under severe economic downturn is limited. In this thesis, I will address these three topics. Due to there being persistent interest in PE performance, return is also investigated for the total sample.

DATA AND METHODS Data for testing the hypotheses were kindly provided by OP Life Assurance Company Ltd and Pohjola Insurance Ltd and includes all PE fund investments of these two entities from the beginning of 1990 to 30th June 2011. Quarterly investment activity is measured by the ratio of capital injected to a fund to the total capital commitment to the fund. Exit activity is defined as the ratio of funds distributed back to investors to the total amount invested by the fund. To measure performance, I use internal rate of return which avoids any inherently arbitrary choices on PE discount rate.

RESULTS I find that PE funds scale down their investment and exit activity during crisis. Potential reasons are explored and, in both cases, include the difference in perceived valuation of the company between the seller and the buyer and unavailability of financing (e.g. credit, equity from IPOs). I also find that PE funds’ net-of-fees return over the whole sample was higher than that of public equity while the outcome was opposite, but not statistically significant, for the period of the financial crisis. Such result may imply that PE has higher risk than public equity which may be due to illiquidity, small size and leverage.