Investors take less risk when their own money is on the line

Thorburn og Bienz
Professor Karin S. Thorburn, Associate Professor Carsten Bienz at Norwegian School of Economics (NHH) and Uwe Walz (Goethe University Frankfurt) have coauthored the paper «Ownership, Wealth, and Risk Taking: Evidence on Private Equity Fund Managers».
By Sigrid Folkestad

21 August 2019 10:02

Investors take less risk when their own money is on the line

The more of a manager's wealth is tied to her fund, the less risk she takes and the smaller is each individual investment, according to a NHH study picked up by the «Institutional Investor», New York Times DealBook and other media.

Associate Professor Carsten Bienz (NHH), Professor Karin S. Thorburn (NHH) and Uwe Walz (Goethe University Frankfurt) have coauthored the paper «Ownership, Wealth, and Risk Taking: Evidence on Private Equity Fund Managers».

 `We examine the incentive effects of private equity (PE) professionals' ownership in the funds they manage`, Carsten Bienz says.

 They show that managers select less risky firms and use more debt financing the more of their wealth is tied into their fund.

The US «Institutional Investor», a leading international business to business publisher, focused primarily on international finance, published a story on the new study last week:

Private Equity Managers Take Less Risk When More of Their Own Money Is on the Line.

Private equity managers with «skin in the game», they write, may be more cautious investors — depending on how much of their personal wealth is at stake, according to researchers from the Norwegian School of Economics and Goethe University Frankfurt.

Other stories on the risk taking-paper:

The New York Times New York Times

The PE Hub Network

Private Equity International

Financial News London

Private Equity News

Secondaries Investor

Bienz and his coauthors have tested their prediction for a sample of PE funds in Norway, where the professionals' private wealth is public.

`Consistent with the model, firm risk decreases and leverage increases with the manager's ownership in the fund, but largely only when scaled with her wealth. Moreover, the higher the ownership, the smaller is each individual investment, increasing fund diversification. Our results suggest that wealth is of first-order importance when designing incentive contracts requiring PE fund managers to coinvest`, Bienz says.