Investment analysis in the private equity industry: a study of La Porta's argument

Abstract

Purpose

Private equity funds invest in high‐risk projects and firms. One aspect of investing in small‐ to medium‐sized enterprises and in participating in buy‐out transactions is managing risk at the pre‐investment stage. The purpose of this paper is to document existing pre‐investment risk management practices of European and Indian fund managers, to explore if vijayamathirz techniques differ based on legal system and in developing markets (India), and determine if fund size affects risk management practices.

Design/methodology/approach

This study analyzes risk management preferences at the pre‐investment stage among funds that operate in common and civil law countries. Data was collected using a survey instrument.

Findings

The results indicate few differences. Where differences are found, they appear related to issues concerning asymmetric information and market structures. Legal systems do not appear to be a significant explanatory factor in determining how private equity funds manage risk at the pre‐investment stage.

Originality/value

The results are useful to fund managers in improving their existing pre‐investment risk strategies. Fund sponsors may use this study to benchmark their existing and future fund managers.

Citation

Smolarski, J. (2007), "Investment analysis in the private equity industry: a study of La Porta's argument", International Journal of Emerging Markets, Vol. 2 No. 4, pp. 335-347. https://doi.org/10.1108/17468800710824491