Private equity fund valuation management during fundraising

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.