Analysing the Private Equity Funds Performance around Fundraising (case of developed markets)

Abstract

In this thesis we analyse the pattern of track record behaviour, particularly the level, to which it could be inflated by GPs. GPs can inflate funds' track record by strategically setting net asset value (NAV) of its' investment as NAVs are computed by the GPs and not subject to compliance with any standards, independent external audit or valuation. The main hypothesis of this thesis is that GPs could use this option to inflate their NAVs in order to increase chances of a new fund successful raise. We find several important stylized facts about NAVs dynamics. NAVs go up during times when firm is raising capital for a new fund, and such increases in NAVs (write-ups) are both statistically and economically significant. We believe that this pattern could be explained by the hypothesis "fooling investors", which implies that firms strategically set NAVs to attract more investors and raise larger funds. We find that funds have a negative relationship between changes in current and last year NAVs; negative relationship between future performance (current MV/NAV) and lagged change in NAVs; no relationship between size of a new fund and a change in lagged NAVs. Key words: valuation, private equity, corporate governance, venture capital, compensation