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Information Asymmetries in Private Equity: Reporting Frequency, Endowments, and Governance

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“If I were running a pension fund, I would be very careful about what was being offered to me.” - Warren Buffett, May 2019, Bloomberg News (https://www.bloomberg.com/news/articles/2019-05-04/buffett-slams-private-equity-for-inflated-returns-debt-reliance.).

Abstract

Using PitchBook’s private equity (PE) database of 4548 PE funds from 42 countries for the 2000 to 2012 period, we find that higher reporting frequency is associated with lower information asymmetry in performance reports from general partners (GPs) to limited partners. We also find that endowments are systematically associated with less reported unrealized returns as a percentage of total returns generated from GPs. Moreover, endowments receive more performance reports from their PE funds, implying more stringent governance. These findings persist after controlling for various institutional and GP characteristics and are robust to several adjustments for endogeneity concerns. This study also contributes to the finance, accounting, and business ethics literature on financial reporting quality.

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Notes

  1. NACUBO stands for the National Association of College and University Business Officers which is a membership organization representing more than 1,900 colleges and universities across the U.S.

  2. PitchBook database is a relatively new source to the academic literature and in recent studies by Brown, Harris, Jenkinson, Kaplan and Robinson (2015) and Harris, Jenkinson and Kaplan (2015), they discovered that PitchBook's coverage is pretty similar to other private equity databases, such as Preqin, Cambridge Associates and Burgiss, in North America but varies outside this region. According to PitchBook, the data are mainly obtained from filings, press releases and websites, and collected, verified, and integrated with additional information by their data teams. Their research team also surveys companies, advisers, investors, lawyers, accountants, and lenders to cross-validate collected data and to gather additional information (see https://pitchbook.com/research-process for detailed information about how PitchBook collect data). Recent research on private equity and angel investors are using this database as the main data source (Cumming and Zhang, 2019; Fuchs, Füss, Jenkinson and Morkoetter, 2019).

  3. We were initially concerned with the quality of the data as some LPs received more than 12 performance reports a year. Our concerns were however alleviated as we sought clarification from our data provider. We were informed that the valuations of unexited portfolio companies that appear in the fund/LP reports are the valuations reported by the GPs to the LPs. GPs are usually (depending on geography) required to value their holdings at least once a year (some do it much more frequently with varying levels of conservativeness) and this is reflected in the NAV and unrealized gains to the LPs. Such reporting behaviors are thus reflected how GPs report performances to LPs.

  4. Distributed value to paid-in ratio (DPI) is the ratio of distributions paid out to investors to the original invested capital and residual value to paid-in ratio (RVPI) which is the of remaining portfolio holdings as valued by the PE fund to the original invested capital per year. Total value to paid-in ratio (TVPI) is the sum of the DPI and RVPI of the PE fund which measures the total returns in each year.

  5. We realize that the relatively small number of endowments in our sample may be something of a concern. However, because the total of their observations is more than 6% of our entire sample, we do not believe this poses a serious problem. Note further that, in un-tabulated results, we performed a detailed analysis of the nine endowments, and we are certain our results are not caused by, nor do they suffer from, a bias toward the well-performing endowments in our sample. The top three performing endowments are quite different from the bottom three when sorting by characteristic. The detailed analysis is not included but is available upon request.

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Acknowledgements

Sofia Johan is at the College of Business, Florida Atlantic University and Minjie Zhang is at the Odette School of Business, University of Windsor. The authors thank Omrane Guedhami, Douglas Cumming, Michael Ewens, Zhenyu Wu, Andrej Gill, Iness Aguir, Marcel Grupp, Kevin Young and Oleg Gredil for their very helpful comments.

Funding

Sofia Johan thanks the Social Sciences and Humanities Research Council of Canada and Phil Smith Center for Free Enterprise for financial support.

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Authors and Affiliations

  1. Phil Smith Center for Free Enterprise, College of Business, Florida Atlantic University, 777 Glades Road, Boca Raton, FL, 33431, USA

    Sofia Johan

  2. University of Aberdeen Business School, Aberdeen, UK

    Sofia Johan

  3. Tilburg Law and Economics Centre (TILEC), Tilburg, The Netherlands

    Sofia Johan

  4. Odette School of Business - University of Windsor, 401 Sunset Avenue, Windsor, ON, N9B 3P4, Canada

    Minjie Zhang

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Johan, S., Zhang, M. Information Asymmetries in Private Equity: Reporting Frequency, Endowments, and Governance. J Bus Ethics 174, 199–220 (2021). https://doi.org/10.1007/s10551-020-04558-6

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