Private Equity and Growth

54 Pages Posted: 2 Nov 2020 Last revised: 1 Feb 2021

See all articles by Boyan Jovanovic

Boyan Jovanovic

New York University - Department of Economics

Sai Ma

Board of Governors of the Federal Reserve System

Peter L. Rousseau

Vanderbilt University - Department of Economics

Date Written: October 2020

Abstract

We study private equity in a dynamic general equilibrium model and ask two questions: (i) Why does the investment of venture funds respond more strongly to the business cycle than that of buyout funds? (ii) Why are venture funds returns higher than those of buyout? On (i), venture brings in new capital whereas buyout largely reorganizes existing capital; this can explain the stronger co-movement of venture with aggregate Tobin's Q. Regarding (ii), venture returns co-move more strongly with aggregate consumption and therefore pay a higher premium. Our model embodies this logic and fits the data on investment and returns well. At the estimated parameters, the two PE sectors together contribute between 14 and 21 percent of observed growth, relative to the extreme case where private equity is absent.

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Suggested Citation

Jovanovic, Boyan and Ma, Sai and Rousseau, Peter L., Private Equity and Growth (October 2020). NBER Working Paper No. w28030, Available at SSRN: https://ssrn.com/abstract=3723267

Boyan Jovanovic (Contact Author)

New York University - Department of Economics ( email )

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Sai Ma

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
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202-452-2870 (Phone)

HOME PAGE: http://saimaecon.com

Peter L. Rousseau

Vanderbilt University - Department of Economics ( email )

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Nashville, TN 37235
United States
615-343-2466 (Phone)
615-343-8495 (Fax)

HOME PAGE: http://www.vanderbilt.edu/econ/faculty/rousseau.html

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