Market-Timing and Agency Costs: Evidence from Private Equity

Abstract

Private equity (PE) funds operate at the interface of private and public capital markets. This paper investigates whether PE fund managers have private information about the valuations of publicly traded securities. Using a dataset of cash flows from 941 buyout and venture funds, I show that PE funds' distribution patterns predict returns of public securities in the industries of the funds' specialization, but fund managers tend to sell at the market peaks only when they have performance fees to harvest. I find that the cost of this agency tension increases in the manager's survival risk and that the managers' knowledge pertains to the public firms' future earnings rather than the discount-rates. My tests distinguish market-timing from reactions to the variation in risk premia and spillover effects of PE activity on public firms. The results help better understand PE performance and have strong implications for PE manager selection. It follows that PE activity embeds private information into the prices of public securities.