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March 17, 2014
Study Co-Authored by Academic Advisor Josh Lerner Featured in Forbes Article

A study co-authored by Brattle academic advisor Josh Lerner, the Jacob H. Schiff Professor of Investment Banking at Harvard Business School (HBS), was recently featured in a Forbes article, “In Private Equity, the Popularity of Investing Alongside Managers – Not in Their Funds – Soars.” The study cautions against the low-or-no-fee structures that are well-known incentives of equity co-investing alongside fund managers.

Traditionally, co-investment has been an appealing way for investors to act on potentially high-return investments made by private equity fund managers. Further, as the quantity of co-investment opportunities has increased in recent years, so too has their quality , with many fund managers offering significant co-investment opportunities for the first time. In the study, Dr. Lerner and co-authors Victoria Ivashina and Lily Fang, caution that in order to take advantage of today’s favorable co-investment environment, private equity limited partners must gain substantial investment expertise that has traditionally been expected of fund managers.

Dr. Lerner’s study, “The Disintermediation of Financial Markets: Direct Investing in Private Equity,” is the first large-sample study of direct private equity investments by institutional investors. The analysis uses data from the investments by seven large institutional investors over twenty years, ending in 2011. The study finds that co-investments underperform traditional fund investments, which appears to be a result of fund managers’ selective offering of deals at market peaks as co-investments. The study also found that the performance of both solo and co-investments worsened in the 2000s, suggesting that any information advantage may have disappeared as the private equity industry has become more competitive.

To read the article in its entirety, please visit the Forbes website.