IFin Seminar, Per Strömberg - Stockholm School of Economics - "A Theory of Liquidity in Private Equity"
Institute of Finance
Date: 22.04.2021 / 12:25 - 13:25
Speaker: Per Strömberg - Stockholm School of Economics
Title: "A Theory of Liquidity in Private Equity"
Date: 22 aprile 2021
Time: 12:25 - 13:25
We develop a model of private equity capturing two critical features of this mar- ket: moral hazard for General Partners (GPs) and illiquidity risk for Limited Partners (LPs). The equilibrium fund structure incentivizes GPs with a profit share and com- pensates LPs with an illiquidity premium. GPs may inefficiently accelerate drawdowns to avoid default by LPs on capital commitments. LPs with higher illiquidity tolerance realize higher returns, leading to return persistence for both funds and LPs. With a sec- ondary market for LP claims, fund persistence decreases, but LP persistence remains. The model can rationalize many empirical findings and offers several new predictions.