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November 19, 2012
Brattle Academic Advisor Josh Lerner Co-Authors Paper on Direct Institutional Investment in Private Equity

Brattle academic advisor Josh Lerner recently co-authored a paper analyzing the trade-offs at work when institutional investors eschew financial intermediaries in favor of direct investment in the private equity setting. The paper, “The Disintermediation of Financial Markets: Direct Investing in Private Equity,” was co-authored by Lily Fang, a Singapore-based associate professor of finance at INSEAD, and Victoria Ivashina, an associate professor of finance at the Harvard Business School.

In the paper, the authors argue that investors who make private equity investments directly in companies get better returns, with lower costs, than those who invest in private equity funds or those who co-invest alongside private equity managers. The authors examined 392 transactions over a 20-year period by seven large global institutional investors. They find that solo, direct investment outperformed all private equity benchmarks used in the study by between 13% and 19% and saved investors the typical 2% management fee as well as the 20% profit sharing charged by private equity funds.

The authors also find that solo institutional investors have a greater advantage when they invest locally, and much of the solo investment analyzed in the research was local to the investor. The paper was recently featured in a Pensions & Investments article, which quoted Dr. Lerner as saying, “If you look at the kind of settings where direct investing does particularly well, it is when it is local investing and investing relatively near to where investors are based. Presumably, investors have advantages of having unique information.”

To read the full paper, please visit the INSEAD website.