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An Analysis of Private Equity Funds: an Investor's Perspective An Analysis of Private Equity Funds: An Investor’s Perspective Sarah Azzi A dissertation submitted in fulfillment of the requirements for the degree of Doctor of Philosophy (Ph.D.) School of Banking and Finance Australian School of Business September 2014 Abstract This dissertation provides a detailed exploration of private equity (PE) funds from the perspective of investors. The PE asset class has experienced tremendous growth over the past few decades and is now a significant mainstay in the portfolios of many institutional investors. This dissertation examines both the unlisted and listed PE markets and the influence of information asymmetries on investor preferences and outcomes. The first study investigates the drivers and performance implications of investor demand in PE funds. Investor demand is proxied by PE fund oversubscription, calculated as the commitments raised by a PE fund relative to the target fund size. The results indicate that PE funds are more likely to be oversubscribed when investors perceive macroeconomic conditions at the time of fundraising to be conducive to the investment strategy. Additionally, investors are found to exhibit fund selection abilities in the buyout space but not in the venture sub-asset class in which information asymmetries are more pronounced. The second study employs a new dataset to examine the decisions and performance of local and foreign investors investing in China-focused PE funds. The Chinese market provides a unique setting for this study because it can be viewed as a quasi-segmented market due to information constraints and legal barriers. The results show that foreigners are more likely to seek fund characteristics that lessen their information asymmetry and provide additional diversification. Moreover, there is iii evidence that domestic-backed PE funds exit a greater number of portfolio companies and secure higher returns on exit relative to foreign-backed funds. The third study evaluates the announcement returns and liquidity effects of investment and exit announcements made by listed PE entities. Using an international sample, the analysis finds that both types of announcements result in wealth gains to shareholders. Liquidity, as measured by trading volume and the Amihud illiquidity ratio, increases significantly on days surrounding these announcements. Additionally, a listed PE entity’s stage focus, financing style, and organizational form are shown to affect announcement returns and stock liquidity. This dissertation contributes to the literature on PE, investor decisions, and information asymmetry. The findings have significant implications for both PE investors and fund managers. iv Acknowledgments It gives me immense pleasure to acknowledge the many individuals who have supported me with this dissertation. First and foremost, I would like to thank my supervisor, Associate Professor Jo-Ann Suchard, for her guidance, expertise and invaluable advice. Her relentless support and encouragement ensured I remained motivated throughout the dissertation process. Additionally, I wish to express gratitude to other faculty members at UNSW, especially Professor Ron Masulis and Mark Humphrey-Jenner, for their stimulating discussions. The services provided by the department staff, including Shirley Webster, Stephanie Osbourne and Ashley Coull, have also been most helpful. Additionally, I am appreciative of the financial support provided by the university in the form of a scholarship and travel assistance to present my work at several international conferences. I wish to acknowledge the insights provided by many of my esteemed industry colleagues. I am truly grateful to Ray King for supporting my decision to pursue a PhD. Other practitioners who deserve a special mention include Ross Barry, Scott McNally, Helen Murdoch, Sam Armstrong and Paul Ranocchiari. I would like to thank my PhD peers, in particular Sidharth Sahgal, Amy Kwan, Seul Koo, Lee Smales and Grant Colthup, who helped make the dissertation process more enjoyable. I am also indebted to my friends and cousins, who remained by my side despite me having limited time to spend with them over the last few years. v Finally, I extend my most heartfelt thanks to my family, including my mum, dad and brother, Adel, for their patience and love. I am truly obliged to my husband, Erik, whose unwavering support and constant care ensured that I remained focused and determined throughout this journey. vi Contents Abstract ...................................................................................................................... iii Acknowledgments ....................................................................................................... v List of Tables ............................................................................................................... x List of Figures ........................................................................................................... xii List of Abbreviations ............................................................................................... xiii Chapter 1. Introduction .............................................................................................. 1 1.1. Motivation of the Dissertation ................................................................................... 1 1.2. Mechanics of PE Funds............................................................................................. 5 1.3. Contribution to the Literature .................................................................................... 8 1.4. Structure of the Dissertation .....................................................................................11 1.5. Dissertation-related Presentations and Awards .........................................................12 Chapter 2. PE Funds and Investor Demand ............................................................ 14 2.1. Introduction .............................................................................................................15 2.2. Literature Review and Hypotheses ...........................................................................18 2.3. Data .........................................................................................................................24 2.3.1 Sample ......................................................................................................24 2.3.2 Variables ...................................................................................................29 2.4. Results .....................................................................................................................38 2.4.1 Determinants of Oversubscription..............................................................38 2.4.2 Oversubscription and Fund Performance ...................................................42 2.5. Conclusion...............................................................................................................53 vii Chapter 3. Investment Decisions of Foreign and Local Investors in PE Funds in China ......................................................................................................................... 56 3.1. Introduction .............................................................................................................57 3.2. Structure of the Chinese PE Market..........................................................................61 3.2.1 Investors in China .....................................................................................61 3.2.2 PE Managers and Funds in China .............................................................63 3.3. Literature and Hypotheses ........................................................................................67 3.4. Data .........................................................................................................................73 3.4.1 Sample ......................................................................................................73 3.4.2 Fund-level Variables .................................................................................76 3.4.3 Investor-level Variables .............................................................................79 3.5. Univariate Results ....................................................................................................82 3.5.1 Chinese PE Funds .....................................................................................82 3.5.2 PE Fund Investors in China .......................................................................84 3.5.3 Chinese PE Investments of Foreign and Local Investors ............................86 3.5.4 Effect of Experience ...................................................................................88 3.6. Multivariate Results .................................................................................................90 3.6.1 Likelihood of Investment by Foreign and Local Investors ...........................90 3.6.2 Determinants of the Size of a PE Investment ..............................................93 3.6.3 Performance of Domestic and Foreign Investors........................................96 3.7. Conclusion............................................................................................................. 101 Chapter 4. Listed PE, Announcement Returns and Liquidity .............................. 104 4.1. Introduction ..........................................................................................................
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