Unpacking Informality Dilemma in Private Equity Markets

Abstract

ABSTRACT Venture capital and private equity represent established asset categories utilized for funding formal entrepreneurial endeavors, often drawing investments from adept fund managers who typically refrain from engaging in informal ventures. However, it is not well investigated how informal economic activities impact resource allocation in private equity. In this paper, we analyze private equity data from 32 economies across Europe and the Asia Pacific region, spanning from 1996-2017. Utilizing a random effects estimation technique, we find that shadow economies have a strong negative impact on private equity investment and inhibit the positive effect of both stock markets and GDP per capita on private equity investment. This suggests that despite a thriving stock market for exit opportunities and favorable wealth conditions facilitating the supply side, economies witness constrained private equity investments due to the existence of informal sectors. This research makes a significant contribution to the cross-country private equity literature and offers valuable policy recommendations.