Investing Outside the Box: Evidence from Alternative Vehicles in Private Capital

by Josh Lerner, Jason Mao, Antoinette Schoar, and Nan R. Zhang

Overview — Private equity vehicles that differ from the traditional structure have become a major portion of investors’ portfolios, especially over the past decade. This study identifies differences in performance across limited and general partners participating in such vehicles, as well as across the two broad classes of alternative vehicles.

Author Abstract

This paper undertakes a comprehensive analysis of alternative investment vehicles in private equity, using unexplored custodial data about 112 limited partners over four decades. We differentiate between alternative vehicles that are GP directed versus those where the LP has some discretion. Of the roughly 5,500 distinct investments made by the LPs in our sample, 32 percent of investments (17percent of capital commitments) were in such alternative vehicles; the allocation increased by more than 10 percentage points over the last decade. Alternative vehicles were far more likely to be offered by larger and North America–based buyout funds. The average performance of these alternative vehicles lagged that of the GPs’ corresponding main funds. The best LP performance was among endowments, private pensions, and insurers. Finally, LPs with better past performance invested in alternative vehicles with better performance, even after conditioning on the GPs’ past records. This result suggests that bargaining between GPs and LPs leads to gradation in investment performance based on the parties’ outside options.