Research

Working Papers

Liquidity Shocks and Private Equity Investment (Job Market Paper) [PDF]

Abstract: Private equity (PE) funds are funded by investors that commit to providing capital on demand. I demonstrate that the composition of these investors influences PE investment due to their 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. This investment distortion results in lower realized fund returns. However, the shock transmission from investors to PE funds is attenuated when there is a liquid secondary market for investors' fund stakes and when funds can enforce drawdowns more effectively. To mitigate liquidity shocks ex ante, funds exposed to shock-prone investors accelerate drawdowns, leading to inefficient investment. Overall, the growing interconnectedness between PE and other financial markets could create systemic risk and have capital allocation implications.

Presentations: FRB Conference on the Interconnectedness of Financial Systems (Scheduled), MFA (Scheduled), Columbia Private Equity Conference (Scheduled), NBER Entrepreneurship Working Group Fall Meeting, UNC Private Equity Research Symposium, Nova Finance PhD Final Countdown, UBC Summer Finance Conference (Poster), UBC Sauder

Cash Drawdowns by PE Fund Age

Spreading Sunshine in Private Equity: Agency Costs and Financial Disintermediation [PDF]

Abstract:  This paper studies how regulatory oversight complements market mechanisms to align incentives and facilitate financial intermediation. My empirical setting exploits an unanticipated reform that significantly improved 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. While disintermediation in PE markets allows investors to internalize agency costs associated with intermediation, it could result in capital misallocation. There is limited evidence of adverse selection in the deals available to investors, but they tend to finance more mature and larger companies when investing directly, as opposed to investing through PE funds. Overall, regulatory oversight can shape the organizational structure of financial markets to address market failures.

Presentations: Annual Conference on Financial Market Regulation (Scheduled), ECGI Conference on the Law and Finance of PE & VC, UBC Sauder

Organizational Structures of the PE Market

Conflicting Fiduciary Duties and Fire Sales of VC-backed Start-ups [SSRN], with Bo Bian and Casimiro A. Nigro

Abstract: This paper studies the interactions between corporate law and venture capital (VC) exits by acquisitions, an increasingly common source of VC-related litigation. We find that transactions by VC funds under liquidity pressure are characterized by (i) a substantially lower sale price; (ii) a greater probability of industry outsiders as acquirers; (iii) a positive abnormal return for acquirers. These features indicate the existence of fire sales, which often satisfy VCs' liquidation preferences but hurt common shareholders, leaving board members with conflicting fiduciary duties and litigation risks. Exploiting an important court ruling that establishes the board’s fiduciary duties to common shareholders as a priority, we find that after the ruling 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. Overall, the evidence has important implications for optimal fiduciary duty design in VC-backed start-ups.

Presentations:  EFA, Junior Corporate Law Scholars Workshop, SGF Conference, Weinberg Center/ECGI Corporate Governance Symposium, MFA,  AFA, AFBC, UNC Private Equity Research Symposium, EALE, UCL / Notre Dame London Law and Finance Sympium, LBS Private Capital Symposium, ECGI-LawFin-LSE Workshop on VC & PE, Rome Junior Finance Conference, LBS Trans-Atlantic Doctoral Conference, HEC-McGill Winter Finance Workshop, CELS, Stanford GSB, Southern California Private Equity Conference, WEFI PhD Workshop, LawFin Workshop on the Political Economy of Financial Regulation, UBC Sauder, Goethe University Frankfurt

Cumulative Cash Distribution by VC Fund Age

Publications

Venture Capital Coordination in Syndicates, Corporate Monitoring, and Firm Performance [Journal] [SSRN], with Jun-Koo Kang and Seungjoon Oh, Journal of Financial Intermediation, 2022

Abstract: This paper examines how the coordination of venture capital (VC) investors in their syndicates, as measured by their geographic concentration, affects firm performance and ex ante contractual terms. Using the introduction of new airline routes between the locations of VC investors as a shock to their coordination costs, we find that firms with geographically concentrated VC investors are more likely to exit successfully than other firms. Geographically proximate VC investors are also more likely to form syndicates in follow-up rounds and to use less intensive staged financing and fewer convertible securities.

Work In Progress

Preemption and Real Option Exercise: Evidence from Mergers

Abstract: Different from standard real option theories, firms often encounter non-exclusive access to investment opportunities in scenarios like acquisitions and patenting. This paper demonstrates that the threat of preemption triggers a ``race to invest'', reducing the value of firms' options to wait. My empirical setting is based on mergers of special purpose acquisition companies (SPACs), listed blank-check entities that have the option of merging with private targets in 2-3 years to take them public. In contrast to conventional mergers, this setting can characterize both exercised and unexercised real options, as well as the time to exercise. When market entries increase the local competition, measured by the number of peers with similar funds for investment, SPACs acquire targets sooner and pre-merger SPAC shares are traded at lower prices. This preemption effect is as important as other variables in standard real option theories, such as volatility and expected profitability, in explaining firms' exercise behavior.

Yingxiang Li, Finance Ph.D. Candidate

UBC Sauder School of Business

2053 Main Mall, Vancouver, BC V6T 1Z2 

yingxiang.li@sauder.ubc.ca 

Google Scholar | SSRN | LinkedIn