معمای عدم نقدینگی: تئوری و شواهد از سهام خصوصی

This paper presents the theory that managers can use the liquidity of securities as a choice variable to screen for deep-pocket investors, those that have a low likelihood of facing a liquidity shock. We assume an information asymmetry about the quality of the manager between the existing investors and the market. The manager then faces a lemons problem when he has to raise funds for a subsequent fund from outside investors, because the outsiders cannot determine whether the manager is of poor quality or the existing investors were hit by a liquidity shock. Thus, liquid investors can reduce the manager's cost of capital in future fundraising. We test the assumptions and predictions of our model in the context of the private equity industry. Consistent with the theory, we find that transfer restrictions on investors are less common in later funds organized by the same private equity firm, where information problems are presumably less severe. Also, partnerships whose investment focus is in industries with longer investment cycles display more transfer constraints. Finally, we present evidence consistent with the assumptions of our model, including the high degree of continuity in the investors of successive funds and the ability of sophisticated investors to anticipate funds that will have poor subsequent performance.

Economists have long argued that liquidity is a mixed blessing. On the one hand, liquidity provides a number of benefits for investors. For example, more liquid assets can provide positive incentive effects through improved performance measurement and more informative stock prices (see, for example, Holmström and Tirole, 1993; Faure-Grimaud and Gromb, 1999; Scharfstein and Stein, 2000). Greater liquidity also allows investors to easily redirect funds toward more efficient uses (as highlighted in the literature on liquidity shocks in the tradition of Diamond and Dybvig, 1983; Shleifer and Vishny, 1997). On the other hand, the literature has identified costs of investor liquidity. Most of these papers rely on the intuition that increased liquidity reduces the incentives for large shareholders to fulfill their monitoring role (as in Bhide, 1993; Aghion et al., 2000). This paper examines a rationale for liquidity that is distinct from the governance-based stories that have dominated the earlier literature. We present a model in which a manager of a private equity firm explicitly chooses the degree of illiquidity of shares to screen for investors with long horizons. Investors who expect to face many liquidity shocks in the future would find these restrictions especially onerous and therefore would avoid investing. The benefits of having liquid investors become apparent once the firm has to go back to the market to raise new capital. If the original investors do not reinvest because of a liquidity shock, the outside investors cannot distinguish whether the initial investors truly faced a liquidity shock or whether they have learned that the fund is a lemon. Transfer constraints de facto allow the manager to trade off increased cost of capital in early fundraising against lower cost in future fundraising by minimizing the lemons problem with respect to the outside market. The novel contribution of our model is that we analyze illiquidity as a choice variable, which can be influenced by the manager of the fund and allows him to screen for deep-pocket investors. Thus, illiquidity here is not the symptom of an underlying asymmetric information problem as it is in most of the asset pricing literature on liquidity. Instead, we model illiquidity as an outcome of the optimization problem that the general partners (GPs) have. The intuition of our model is driven by the information asymmetry between inside and outside investors and not by the fact that a private equity fund could face large transaction costs if it was forced to liquidate prematurely. The transfer of equity stakes is independent of the capital commitment to the fund. We motivate the analysis by considering a setting where the monitoring role of large investors is much less important, but severe restrictions on liquidity are commonplace: private equity limited partnerships. Three observations inspire our analysis. First, limited partners (LPs) in U.S. private equity funds typically have very limited rights and incentives to influence or direct the funds’ activities.1 Even though in some cases investors can, for example, vote to dissolve the fund, this hardly ever occurs. Second, private equity investors require wide-ranging information rights that allow them to monitor the performance of the fund. Usually, investors meet with their general partners on a regular basis to discuss the progress of the portfolio firms. In dealing with unsatisfactory funds, the response of institutional investors typically is to not invest in the subsequent funds raised by the private equity organization. All the limited partners we talked to confirmed that they choose exit over voice when they are dissatisfied with the performance of a fund. The investors’ effort to monitor the fund is largely driven by the desire to get better information that informs the reinvestment decision. Third, serious limitations on the transferability of partnership interests (far beyond what is required by securities law) are commonplace. The presence of these curbs is particularly puzzling given that partnership interests are very illiquid to start with, because of the large stakes held by each limited partner.2 We believe that the choice of liquidity as a screening device is a more general phenomenon, which applies to a number of situations involving security design. Examples include other private partnerships, such as real estate investment funds and private placements raised by public companies. One illustration are the so-called PIPE transactions (Private Investments in Public Entities), which involve a public company raising capital from a private investor, often a hedge fund. Similarly, Warren Buffett of Berkshire-Hathaway allegedly resists splitting the stock of his fund (an individual share is trading in May 2003 at a value above $2000) because he wants to make his fund only accessible to wealthy individuals who presumably have long horizons. This intuition also has relevance in many other settings in corporate finance. Consider, for example, a biotechnology start-up that has the choice of either undertaking an initial public offering (IPO) or raising capital in a strategic alliance with a large pharmaceutical company. The former solution often provides a lower cost of capital in the short run, particularly if the IPO market is hot. One of the reasons that we observe the heavy dependence on strategic alliances in biotechnology could be that start-ups want to secure very liquid investors with long horizons, who will be more likely to provide follow-on financing. We then turn to an empirical examination of the testable predictions of our theory based on a sample of about 250 private equity partnership agreements. We show that, consistent with our model, the restrictions on limited partners’ ability to transfer funds are less common in later funds organized by the same private equity group, where information problems are presumably less severe. Also, private equity partnerships whose investment focus is in industries with longer investment cycles display more transfer constraints. Funds that invest in businesses that take a long time before they produce observable results are prone to increased information asymmetry. In congruence with our theory, these funds are more concerned about preventing transfers of equity stakes. For example, we find that funds specializing in the biotechnology investments have more transfer constraints, while those focused on software and the Internet have fewer constraints. We argue that these findings are consistent with the idea that, in situations where asymmetric information problems are more severe for future fundraising, more emphasis will be placed on selecting long-horizon investors. Another finding is that contracts by California venture capital partnerships are much less likely to employ many restrictive provisions. One interpretation of this result is that in the close-knit California venture community information on the relative performance of funds could be more readily ascertained. We also empirically examine two crucial assumptions of our model: (1) that limited partners can learn about the quality of the funds in which they invest and thus have inside information, and (2) that a substantial persistence exists in the composition of limited partners between different funds of a private equity organization. We find support for the first assumption using data on the private equity investments of two large and sophisticated limited partners. We focus on their decisions to reinvest or discontinue commitments to partnerships. We show that these LPs on average discontinue funds that have lower returns, while those that were reinvested experience higher returns subsequently. These findings indicate that private equity investors are able to acquire inside information about the funds they are involved in through the investment process. Furthermore, in line with our theoretical assumptions, we find that funds that were discontinued subsequently raise smaller funds, which could reflect the fact that the departure of an inside investor signals negative information to the outside market. Second, we show that a considerable degree of continuity is evident in the limited partners in the successive funds of private equity organizations. Finally, we examine a possible alternative explanation for the patterns seen here. The use of transferability constraints could be a mechanism through which general partners prohibit loose-cannon troublemakers from investing in their funds. Established GPs could have less to fear from such LPs and thus make less use of these mechanisms. We present both anecdotal and large-sample evidence that is inconsistent with this alternative explanation. The plan of the paper is as follows. Section 2 considers the institutional setting of private equity and discusses an illustrative case. We present the model in Section 3. Section 4 discusses the data and the analysis of private equity contracts. Section 5 discusses the supplemental analyses. The final section concludes the paper.

This paper examines the rationales for restrictions on liquidity. It suggests an alternative to the governance-based rationale traditionally offered for such curbs, focusing on the private equity industry. The model suggests that imposing restrictions on the liquidity of investor ownership stakes could enable managers, in our case GPs of private equity groups, to influence the composition of investors. We explicitly model liquidity constraints as a choice variable that allows the GP to alleviate the adverse selection problem in follow-on fundraising by screening for deep pocket investors. We test these predictions in the context of the private equity industry. We find that, consistent with our theory, funds that are less prone to asymmetric information have fewer transfer constraints. For example, later funds of the same private equity firm have fewer transfer constraints, consistent with the idea that these funds are less affected by information asymmetries, because the firm has established a track record. Moreover, funds that operate in industries with longer investment cycles have more constraints. Also, funds in the close-knit California private equity environment have fewer constraints than East Coast funds, where information could travel more slowly. We also present evidence consistent with the assumptions of the model. In particular, we show that the existing investors of a fund are able to obtain inside information about the quality of the partnership. The applications of these ideas are much broader and more general than the private equity setting. Many corporate finance transactions impose restrictions that are in excess of what are required by securities law. Exploring the extent to which some of these same rationales could be at work is a natural extension of this analysis. An understanding of these issues, however, is particularly urgent in the private equity industry. In the past few years, a surge of interest has been evident on the part of limited partners in liquidating their holdings. In some cases, these groups have sought to reduce their overall exposure to private equity; in other instances, they have sought to garner dry powder for further private equity investments (for a discussion, see Toll, 2000). As the theoretical analysis above suggests, such moves have the potential for very positive features, but also for substantial costs. Thus, gaining a better understanding of the trade-offs associated with liquidity is important to academics and practitioners alike.