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Gold Rush Dynamics Of Private Equity

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Executive Summary

The authors develop a model with learning that likens private equity waves to gold rushes. Fund managers differ in talent, the stock of potential target firms is depletable, and investment profitability is inferred from past outcomes. The model produces waves with endogenous transitions from boom to bust. Supply and demand are inelastic, and supply comoves with investment valuations. Performance differences are persistent, first-time funds underperform the industry, and funds raised during booms are less likely to see follow-on activity.

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