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Li, Yingxiang

University of British Columbia

This thesis is a collection of three essays that explore frictions and trade-offs in financial intermediation within private equity (PE) markets. It covers topics such as funding shocks, illiquidity, and the role of financial regulation in incentive alignment when PE funds intermediate investors' capital to finance private companies. The first essay studies funding shocks faced by PE funds due to their investors’ heterogeneous costs of financing illiquid investments during liquidity shocks. The variation stems from differences in the liability structure across investors. During periods of abnormal insured losses from natural disasters, funds with more committed capital from property and casualty insurers invest less compared to other nearly identical funds. However, the shock transmission from investors to PE funds is attenuated ex post when funds can adjust their investor base more easily or enforce drawdowns more effectively. To mitigate liquidity shocks ex ante, funds exposed to shock-prone investors accelerate drawdowns, leading to inefficient investment. The second essay investigates the role of regulatory oversight in increasing market transparency and facilitating financial intermediation. I exploit an unanticipated reform that substantially expanded the regulatory oversight of private equity (PE) fund advisers. Institutional investors that have more pre-existing relationships with regulated PE fund advisers are less likely to bypass external fund vehicles when investing in private companies. There is little evidence of adverse selection in the deals available to investors, but they tend to finance more mature, larger, and less innovative companies when investing directly, as opposed to investing through PE funds. The third essay studies interactions between corporate law and venture capital (VC) exits by acquisitions, an increasingly common source of VC-related litigation. Transactions by VC funds under liquidity pressure tend to be fire sales, which often satisfy VCs' liquidation preferences but hurt common shareholders, leaving board members with conflicting fiduciary duties and litigation risks. After an important court ruling that establishes the board’s fiduciary duties to common shareholders as a priority, maturing VCs become less likely to exit by fire sales and they distribute cash to their investors less timely. However, VCs experience more difficult fundraising ex-ante, highlighting the potential cost of a common-favoring regime.

Text

2024-08-06

Attribution-NonCommercial-NoDerivatives 4.0 International

http://hdl.handle.net/2429/88874

Business Administration - Finance

University of British Columbia

UBCV

http://creativecommons.org/licenses/by-nc-nd/4.0/