Private equity fund valuation management during fundraising
Name
Baik-kbaik-PhD-Management-2022-thesis.pdf
Description
Thesis PDF
Size
2.36 MB
Format
Adobe PDF
Checksum (MD5)
2071d400567a23bcd640b249791f202b
Author(s)
Baik, Brian (Kunho)
Advisor(s)
Verdi, Rodrigo S.
Date Issued
May 2022
Publisher
Massachusetts Institute of Technology
Abstract
I investigate whether and how private equity fund managers (GPs) inflate their interim fund valuations (net asset values or NAVs) during fundraising periods. Specifically, I study the extent to which the GPs inflate NAVs by managing valuation assumptions (e.g., valuation multiples), influencing the financial metrics (e.g., EBITDA and sales) reported by the private firms in their portfolios, or both. Using a sample of buyout funds and their portfolio firms in Europe, I find that funds managed by low reputation GPs show more dramatic forms of NAV inflation by managing upward not only valuation multiples but also portfolio firm performance. The results are robust to a number of alternative explanations. Low reputation funds that employ some form of real earnings management show success in fundraising. Overall, I illustrate the mechanisms behind inflated fund valuations during fundraising periods and provide evidence supporting the argument that low reputation GPs are more likely manipulating NAVs than timing fundraising periods.
MIT Department
Sloan School of Management
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