Investing Outside the Box: Evidence from Alternative Vehicles in Private Capital

66 Pages Posted: 28 Aug 2018 Last revised: 24 Feb 2023

See all articles by Josh Lerner

Josh Lerner

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Private Capital Research Institute

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Jason Mao

State Street Corporate

Nan R. Zhang

State Street Global Exchange

Multiple version iconThere are 2 versions of this paper

Date Written: August 2018

Abstract

This paper undertakes a comprehensive analysis of alternative investment vehicles in private equity, using unexplored custodial data about 112 limited partners over four decades. We differentiate between alternative vehicles that are GP-directed versus those where the LP has some discretion. Of the roughly 5500 distinct investments made by the LPs in our sample, 32% of investments (17% of capital commitments) were in such alternative vehicles; the allocation increased by more than 10 percentage points over the last decade. Alternative vehicles were far more likely to be offered by larger and North America-based buyout funds. The average performance of these alternative vehicles lagged that of the GPs’ corresponding main funds. The best LP performance was among endowments, private pensions, and insurers. Finally, LPs with better past performance invested in alternative vehicles with better performance, even after conditioning on the GPs’ past records. This result suggests that bargaining between GPs and LPs leads to gradation in investment performance based on the parties’ outside options.

Suggested Citation

Lerner, Josh and Schoar, Antoinette and Mao, Jason and Zhang, Nan R., Investing Outside the Box: Evidence from Alternative Vehicles in Private Capital (August 2018). NBER Working Paper No. w24941, Available at SSRN: https://ssrn.com/abstract=3239277

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Antoinette Schoar

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Jason Mao

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Nan R. Zhang

State Street Global Exchange ( email )

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