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Intermediation in Private Equity: The Role of Placement Agents

Published online by Cambridge University Press:  15 May 2019

Matthew D. Cain
Affiliation:
Cain, mdcain@outlook.com, University of California Berkeley Center for Law and Business
Stephen B. McKeon
Affiliation:
McKeon, smckeon@uoregon.edu, University of Oregon Lundquist College of Business
Steven Davidoff Solomon
Affiliation:
Solomon, steven.solomon@law.berkeley.edu, University of California Berkeley School of Law

Abstract

Intermediation in private equity involves illiquid investments, professional investors, and high information asymmetry. We use this unique setting to empirically evaluate theoretical predictions regarding intermediation. Using placement agents has become nearly ubiquitous, but agents are associated with significantly lower abnormal returns in venture and real estate funds, consistent with investor capture and influence peddling. However, returns are higher for buyout funds employing a top-tier agent and for first-time real estate and venture funds employing an agent, and are less volatile for agent-affiliated funds, consistent with a certification role. Our results suggest heterogeneous motives for intermediation in the private equity industry.

Type
Research Article
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

The authors thank an anonymous referee, Jean-Noël Barrot, John Chalmers, Diane Del Guercio, Ro Gutierrez, Yael Hochberg, Paul Malatesta (the editor), Youchang Wu, and conference and seminar participants at the 2015 American Finance Association Annual Meeting, 2015 Private Equity Research Consortium (PERC) Meeting, 2014 Argentum Centre for Private Equity Symposium, 2014 American Law and Economics Association Annual Meeting, 2015 Conference to honor John McConnell’s contributions in the field of finance, The Brattle Group, Indiana University, the U.S. Securities and Exchange Commission, the University of Notre Dame, and the University of Oregon for helpful comments. They also thank James Hicks for his research assistance.

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