Financial Decision Making in the Market for Private Assets

This dissertation examines how investment managers and institutional investors make strategic decisions in private capital markets. Across two chapters, the dissertation studies how private equity general partners adjust investment behavior during the life of a fund and how industry growth in size and scope relates to fund performance, Together, the chapters provide new empirical and theoretical insights into decision-making and performance in markets characterized by illiquidity, information asymmetry, and long investment horizons. The first chapter finds private equity fund general partners (GPs) strategically adjust their investment strategies in response to early returns. Funds experiencing higher early returns in the fund life cycle subsequently shift away from riskier investments in later years and experience lower returns. After early success, funds become more selective and concentrated, reducing exposure to high-risk sectors while focusing investments within preferred sectors and geographies. Early winners also commit larger portions of capital to later deals and hold these investments for longer periods. In contrast, funds with very low early returns do the opposite. Despite making low-return and low-risk investments later on, funds with strong early returns still outperform over the life of the fund and raise their next fund faster. These findings are consistent with GPs using early success in a fund to raise a next fund sooner and then turning their attention to this next fund. The second chapter examines how the growth of the private fund industry relates to performance. Using a global dataset of more than 11,000 funds across multiple asset classes, it analyzes relationships between performance and fund size, growth in fund size, general partner investment scope, and fundraising speed. The results show no evidence of systematic declines in median performance as the industry has grown. While average returns for larger funds are slightly lower, this difference is driven primarily by greater dispersion among smaller funds rather than meaningful differences in median outcomes. Collectively, these chapters contribute to the literature on private asset markets by documenting how incentives, industry structure, and portfolio considerations shape financial decision making by both fund managers and institutional investors.