Hostname: page-component-586b7cd67f-vdxz6 Total loading time: 0 Render date: 2024-11-30T15:12:32.009Z Has data issue: false hasContentIssue false
  • English
  • Français

Diversification in Private Equity Funds: On Knowledge Sharing, Risk Aversion, and Limited Attention

Published online by Cambridge University Press:  16 October 2013

Mark Humphery-Jenner
Mark Humphery-Jenner*
Affiliation:
[email protected], Australian School of Business, University of New South Wales, Sydney, NSW 2052, Australia.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines diversification as a source of value creation and destruction in private equity (PE) funds. Previous literature has focused on the “diversification discount” in corporations. However, in PE funds, diversification might increase returns by ameliorating managerial risk aversion and facilitating knowledge sharing. I examine a sample of 1,505 PE funds and show that industry and geographic diversification can increasePE fund returns. This is likely due to knowledge sharing and learning, not merely risk reduction. Diversification can reduce returns if it spreads staff too thinly across industries or is motivated by risk aversion rather than performance bonuses.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 5 , October 2013 , pp. 1545 - 1572
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ahuja, G. “Collaboration Networks, Structural Holes, and Innovation: A Longitudinal Study.” Administrative Science Quarterly, 45 (2000), 425–455.CrossRefGoogle Scholar
Almeida, P., and Phene, A.. “Subsidiaries and Knowledge Creation: The Influence of the MNC and Host Country on Innovation.” Strategic Management Journal, 25 (2004), 847–864.CrossRefGoogle Scholar
Almeida, P.; Song, J.; and Grant, R. M.. “Are Firms Superior to Alliances and Markets? An Empirical Test of Cross-Border Knowledge Building.” Organization Science, 13 (2002), 147–161.CrossRefGoogle Scholar
Amihud, Y., and Lev, B.. “Does the Corporate Ownership Structure Affect Its Strategy Towards Diversification?” Strategic Management Journal, 20 (1999), 1063–1069.3.0.CO;2-S>CrossRefGoogle Scholar
Aron, D. J. “Ability, Moral Hazard, Firm Size, and Diversification.” Rand Journal of Economics, 19 (1988), 72–87.CrossRefGoogle Scholar
Aw, M. S. B., and Chatterjee, R. A.. “The Performance of UK Firms Acquiring Large Cross-Border and Domestic Takeover Targets.” Applied Financial Economics, 14 (2004), 337–349.CrossRefGoogle Scholar
Berger, P. G., and Ofek, E.. “Diversification’s Effect on Firm Value.” Journal of Financial Economics, 37 (1995), 39–65.CrossRefGoogle Scholar
Berger, P. G., and Ofek, E.. “Causes and Effects of Corporate Refocusing Programs.” Review of Financial Studies, 12 (1999), 311–345.CrossRefGoogle Scholar
Bygrave, W. D. “Syndicated Investments by Venture Capital Firms: A Networking Perspective.” Journal of Business Venturing, 2 (1987), 139–154.CrossRefGoogle Scholar
Campa, J. M., and Kedia, S.. “Explaining the Diversification Discount.” Journal of Finance, 57 (2002), 1731–1762.CrossRefGoogle Scholar
Chakrabarti, A.; Singh, K.; and Mahmood, I.. “Diversification and Performance: Evidence from East Asian Firms.” Strategic Management Journal, 28 (2007), 101–120.CrossRefGoogle Scholar
Chiampou, G. F., and Kallett, J. J.. “Risk/Return Profile of Venture Capital.” Journal of Business Venturing, 4 (1989), 1–10.CrossRefGoogle Scholar
Cochrane, J. H. “The Risk and Return of Venture Capital.” Journal of Financial Economics, 75 (2005), 3–52.CrossRefGoogle Scholar
Demiroglu, C., and James, C. M.. “The Role of Private Equity Group Reputation in LBO Financing.” Journal of Financial Economics, 96 (2010), 306–330.CrossRefGoogle Scholar
Denis, D. J.; Denis, D. K.; and Yost, K.. “Global Diversification, Industrial Diversification, and Firm Value.” Journal of Finance, 57 (2002), 1951–1979.CrossRefGoogle Scholar
Diller, C., and Kaserer, C.. “What Drives Private Equity Returns? Fund Inflows, Skilled GPs, and/or Risk?” European Financial Management, 15 (2009), 643–675.CrossRefGoogle Scholar
Dimov, D., and De Clercq, D.. “Venture Capital Investment Strategy and Portfolio Failure Rate:A Longitudinal Study.” Entrepreneurship Theory and Practice, 30 (2006), 207–223.CrossRefGoogle Scholar
Eckbo, B. E., and Thorburn, K. S.. “Gains to Bidder Firms Revisited: Domestic and Foreign Acquisitions in Canada.” Journal of Financial and Quantitative Analysis, 35 (2000), 1–25.CrossRefGoogle Scholar
Gompers, P.; Kovner, A.; and Lerner, J.. “Specialization and Success: Evidence from Venture Capital.” Journal of Economics and Management Strategy, 18 (2009), 817–844.Google Scholar
Gompers, P., and Lerner, J.. “What Drives Venture Capital Fundraising?” Brookings Papers on Economic Activity, 1998 (1998), 149–192.CrossRefGoogle Scholar
Gompers, P., and Lerner, J.. “Money Chasing Deals? The Impact of Fund Inflows on Private Equity Valuation.” Journal of Financial Economics, 55 (2000), 281–325.CrossRefGoogle Scholar
Guler, I. “Throwing Good Money after Bad? Political and Institutional Influences on Sequential Decision Making in the Venture Capital Industry.” Administrative Science Quarterly, 52 (2007), 248–285.CrossRefGoogle Scholar
Hamel, G. “Competition for Competence and Interpartner Learning within International Strategic Alliances.” Strategic Management Journal, 12 (1991), 83–103.CrossRefGoogle Scholar
Hansen, M. T. “Knowledge Networks: Explaining Effective Knowledge Sharing in Multiunit Companies.” Organization Science, 13 (2002), 232–248.CrossRefGoogle Scholar
Haynes, M.; Thompson, S.; and Wright, M.. “The Impact of Divestment on Firm Performance: Empirical Evidence from a Panel of UK Companies.” Journal of Industrial Economics, 50 (2002), 173–196.CrossRefGoogle Scholar
Hitt, M. A.; Hoskisson, R. E.; and Ireland, R. D.. “A Mid-Range Theory of the Interactive Effects of International and Product Diversification on Innovation and Performance.” Journal of Management, 20 (1994), 297–326.CrossRefGoogle Scholar
Hitt, M. A.; Hoskisson, R. E.; and Kim, H.. “International Diversification: Effects on Innovation and Firm Performance in Product-Diversified Firms.” Academy of Management Journal, 40 (1997), 767–798.CrossRefGoogle Scholar
Hochberg, Y. V.; Ljungqvist, A.; and Lu, Y.. “Whom You Know Matters: Venture Capital Networks and Investment Performance.” Journal of Finance, 62 (2007), 251–302.CrossRefGoogle Scholar
Hoskisson, R. E.; Hitt, M. A.; and Hill, C. W. L.. “Managerial Risk Taking in Diversified Firms: An Evolutionary Perspective.” Organization Science, 2 (1991), 296–314.CrossRefGoogle Scholar
Humphery-Jenner, M. “Private Equity Fund Size, Investment Size, and Value Creation.” Review ofFinance, 16 (2012), 799–835.CrossRefGoogle Scholar
Humphery-Jenner, M. L., and Powell, R. G.. “Firm Size, Takeover Profitability and the Effectiveness of the Market for Corporate Control: Does the Absence of Anti-Takeover Provisions Make a Difference?” Journal of Corporate Finance, 17 (2011), 418–437.CrossRefGoogle Scholar
Hurry, D.; Miller, A. T.; and Bowman, E. H.. “Calls on High Technology: Japanese Exploration of Venture Capital Investment in the United States.” Strategic Management Journal, 13 (1992),85–101.CrossRefGoogle Scholar
Ivanov, V. I., and Xie, F.. “Do Corporate Venture Capitalists Add Value to Start-Up Firms? Evidence from IPOs and Acquisitions of VC-Backed Companies.” Financial Management, 39 (2010),129–152.CrossRefGoogle Scholar
Jenkins, M., and Tallman, S.. “The Shifting Geography of Competitive Advantage: Clusters, Networks and Firms.” Journal of Economic Geography, 10 (2010), 599–618.CrossRefGoogle Scholar
Jones, G. R., and Hill, C. W. L.. “Transaction Cost Analysis of Strategy-Structure Choice.” Strategic Management Journal, 9 (1988), 159–172.CrossRefGoogle Scholar
Kandel, E.; Leshchinskii, D.; and Yuklea, H.. “VC Funds: Aging Brings Myopia.” Journal of Financial and Quantitative Analysis, 46 (2011), 431–457.CrossRefGoogle Scholar
Kaplan, S. N., and Schoar, A.. “Private Equity Performance: Returns, Persistence, and Capital Flows.” Journal of Finance, 60 (2005), 1791–1823.CrossRefGoogle Scholar
Knill, A. “Should Venture Capitalists Put All Their Eggs in One Basket? Diversification versus Pure-Play Strategies in Venture Capital.” Financial Management, 38 (2009), 441–486.CrossRefGoogle Scholar
Kogut, B. “Normative Observations on the International Value-Added Chain and Strategic Groups.” Journal of International Business Studies, 15 (1984), 151–167.CrossRefGoogle Scholar
Kogut, B. “Designing Global Strategies: Comparative and Competitive Value Added Chains.” Sloan Management Review, 27 (1985), 15–28.Google Scholar
Korteweg, A., and Sorensen, M.. “Risk and Return Characteristics of Venture Capital-Backed Entrepreneurial Companies.” Review of Financial Studies, 23 (2010), 3738–3772.CrossRefGoogle Scholar
Lin, S.-J., and Lee, J. R.. “Configuring a Corporate Venturing Portfolio to Create Growth Value: Within-Portfolio Diversity and Strategic Linkage.” Journal of Business Venturing, 26 (2011),489–503.CrossRefGoogle Scholar
Ljungqvist, A., and Richardson, M.. “The Cash Flow, Return and Risk Characteristics of PrivateEquity.” Working Paper No. 9454, NBER (2003).Google Scholar
Lossen, U. “The Performance of Private Equity Funds: Does Diversification Matter?” Working Paper No. 2006-14, Ludwig-Maximilians-Universität München (2006).CrossRefGoogle Scholar
Matsusaka, J. G., and Nanda, V.. “Internal Capital Markets and Corporate Refocusing.” Journal of Financial Intermediation, 11 (2002), 176–211.CrossRefGoogle Scholar
McDougall, P. P.; Robinson, R. B.; and DeNisi, A. S.. “Modeling New Venture Performance: An Analysis of New Venture Strategy, Industry Structure, and Venture Origin.” Journal of Business Venturing, 7 (1992), 268–289.CrossRefGoogle Scholar
Metrick, A., and Yasuda, A.. “The Economics of Private Equity Funds.” Review of Financial Studies, 23 (2010), 2303–2341.CrossRefGoogle Scholar
Miller, D. J. “Technological Diversity, Related Diversification, and Firm Performance.” Strategic Management Journal, 27 (2006), 601–619.CrossRefGoogle Scholar
Moeller, S. B., and Schlingemann, F. P.. “Global Diversification and Bidder Gains: A Comparison between Cross-Border and Domestic Acquisitions.” Journal of Banking and Finance, 29 (2005), 533–564.CrossRefGoogle Scholar
Moeller, S. B.; Schlingemann, F. P.; and Stulz, R. M.. “Firm Size and the Gains from Acquisitions.” Journal of Financial Economics, 73 (2004), 201–228.CrossRefGoogle Scholar
Moeller, S. B.; Schlingemann, F. P.; and Stulz, R. M.. “Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm Returns in the Recent Merger Wave.” Journal of Finance, 60 (2005), 757–782.CrossRefGoogle Scholar
Palich, L. E.; Cardinal, L. B.; and Miller, C. C.. “Curvilinearity in the Diversification-Performance Linkage: An Examination of Over Three Decades of Research.” Strategic Management Journal, 21 (2000), 155–174.3.0.CO;2-2>CrossRefGoogle Scholar
Phalippou, L. “Venture Capital Funds: Flow-Performance Relationship and Performance Persistence.” Journal of Banking and Finance, 34 (2010), 568–577.CrossRefGoogle Scholar
Phalippou, L., and Gottschalg, O.. “The Performance of Private Equity Funds.” Review of Financial Studies, 22 (2009), 1747–1776.CrossRefGoogle Scholar
Phene, A., and Almeida, P.. “Innovation in Multinational Subsidiaries: The Role of Knowledge Assimilation and Subsidiary Capabilities.” Journal of International Business Studies, 39 (2008), 901–919.CrossRefGoogle Scholar
Qian, G.; Khoury, T. A.; Peng, M. W.; and Qian, Z.. “The Performance Implications of Intra- and Inter-Regional Geographic Diversification.” Strategic Management Journal, 31 (2010), 1018–1030.CrossRefGoogle Scholar
Roure, J. B., and Maidique, M. A.. “Linking Prefunding Factors and High-Technology Venture Success: An Exploratory Study.” Journal of Business Venturing, 1 (1986), 295–306.CrossRefGoogle Scholar
Schilling, M. A., and Phelps, C. C.. “Interfirm Collaboration Networks: The Impact of Large-Scale Network Structure on Firm Innovation.” Management Science, 53 (2007), 1113–1126.CrossRefGoogle Scholar
Siegel, R.; Siegel, E.; and MacMillan, I. C.. “Corporate Venture Capitalists: Autonomy, Obstacles, and Performance.” Journal of Business Venturing, 3 (1988), 233–247.CrossRefGoogle Scholar
Tallman, S., and Chacar, A. S.. “Communities, Alliances, Networks and Knowledge in Multinational Firms: A Micro-Analytic Framework.” Journal of International Management, 17 (2011a),201–210.CrossRefGoogle Scholar
Tallman, S., and Chacar, A. S.. “Knowledge Accumulation and Dissemination in MNEs: A Practice-Based Framework.” Journal of Management Studies, 48 (2011b), 278–304.CrossRefGoogle Scholar
Tanriverdi, H., and Venkatraman, N.. “Knowledge Relatedness and the Performance of Multibusiness Firms.” Strategic Management Journal, 26 (2005), 97–119.CrossRefGoogle Scholar
Teece, D. J. “Economies of Scope and the Scope of the Enterprise.” Journal of Economic Behavior & Organization, 1 (1980), 223–245.CrossRefGoogle Scholar
Teece, D. J. “Towards an Economic Theory of the Multiproduct Firm.” Journal of Economic Behavior &Organization, 3 (1982), 39–63.CrossRefGoogle Scholar
Tsai, W. “Knowledge Transfer in Intraorganizational Networks: Effects of Network Position and Absorptive Capacity on Business Unit Innovation and Performance.” Academy of Management Journal, 44 (2001), 996–1004.CrossRefGoogle Scholar
Villalonga, B. “Does Diversification Cause the ‘Diversification Discount’?” Financial Management, 33 (2004), 5–27.Google Scholar
Zacharakis, A. L., and Meyer, G. D.. “The Potential of Actuarial Decision Models: Can They Improve the Venture Capital Investment Decision?” Journal of Business Venturing, 15 (2000), 323–346.CrossRefGoogle Scholar