Essays On Private Equity And Real Estate PDF Download

This dissertation contains three essays in illiquid assets. The first two chapters study private equity. The first chapter examines whether the incentives implicit in general partners' contracts lead them to make value-destroying investments? Using a sample of European buyouts, I show that the structure of compensation contracts encourages GPs to overinvest in deals that are in later period of the investment phase to maximize their fee profits, even if the deals are unprofitable. Within each fund, deals made in later period of the investment phase have lower profit growth and lower net returns than those made earlier. This relationship persists after controlling for GP skills, fund sequences, and vintage year. Importantly, later period deals are more likely to be value-destroying. The results are concentrated in funds with higher earlier performance and in more established funds, suggesting that GPs with lower reputation costs are more likely to engage in such behavior. The results further suggest that the current fee structure can induce GPs to maximize their profits at the expense of LPs. The second chapter studies the effects of infrastructure privatization with the focus the effect of private equity acquisition of infrastructure. The privatization of infrastructure, especially by investor-owned private equity (PE) funds, raises questions about the economics of public goods and the policy question of who should own infrastructure assets. Airports represent a class of infrastructure that is increasingly important to the global economy and has experienced significant privatization in recent decades. This paper studies how ownership changes affect airport performance, with a focus on understanding both the role of privatization and any distinct effects of PE vs. non-PE private ownership in subsequent transactions. Across twenty performance measures, we observe marked improvements after PE acquisitions--in particular from non-PE private firms, which account for most of the PE deals--with no evidence of pre-trends. In contrast, non-PE privatizations and subsequent acquisitions lead to weaker or no improvement, and where it does occur it appears to reflect targeting rather than operational changes. We also study fees charged to airlines and measures from the income statement; these indicate higher prices after privatization and dramatically higher net income following PE acquisitions. Overall, we find relatively little evidence that privatization alone increases performance, and instead find strong evidence that infrastructure funds improve airport efficiency. The third chapter studies whether one's wealth affects her preference for liquidity. Korea has a unique rental system where a tenant can choose between paying a lump sum deposit called Chonsei or a monthly rent when renting a house. This unique system allows me to take the difference between the cost of monthly rent payment and the cost of Chonsei to calculate the liquidity premium for a quasi-identical asset. I find that within an apartment complex-year month, per unit price of liquidity decreases in size and price of apartment units, suggesting that wealthier households, ex-post, are given less compensation for illiquidity. The result expands the notion of investor clientele in liquidity premium by Amihud and Mendelson (1986) indicating that the investment horizon of investors may not be the only determinant in the cross-sectional explanation of liquidity premium. Other characteristics, such as wealth, could affect one’s preference for liquidity.