Publications
Publications
- 2024
- HBS Working Paper Series
Private Equity Fund Valuation Management during Fundraising
By: Brian K. Baik
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 financial metrics (e.g., EBITDA and sales) reported by the portfolio firms, 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 earnings. The results are robust to a number of alternative explanations. Overall I illustrate the mechanisms behind inflated fund valuations during fundraising periods and provide support for the argument that low reputation GPs are more likely to manipulate NAVs than time fundraising periods.
Keywords
Private Equity; Institutional Investors; Valuation Multiples; Earnings Management; Private Firms; Valuation; Investment Funds
Citation
Baik, Brian K. "Private Equity Fund Valuation Management during Fundraising." Harvard Business School Working Paper, No. 23-013, August 2022. (Revised May 2024.)