Would I Lie to you? On Private Equity Intermediary Valuation Reports

The Essex Finance Centre (EFiC) warmly invites you to join the research seminar with Professor Ludovic Phalippou from Said Business School.

Private equity fund managers provide interim valuations for portfolio companies, which exhibit systematic biases due to valuation smoothing. These reports also contain extensive qualitative disclosures, offering valuable insights beyond the reported Net Asset Values (NAVs).

We put together a new international dataset of more than 20,000 General Partner (GP) reports, and demonstrate that narrative tone is a robust predictor of final investment outcomes. Deals with more optimistic interim tone achieve significantly higher final multiples on invested capital (MOIC), even after controlling for quantitative performance metrics. Notably, the informational value of GP reports is high, as machine learning exercises reveal accurate predictions of final deal performance.

Our findings suggest that GPs strategically use qualitative disclosures to communicate nuanced expectations to Limited Partners (LPs). This behaviour aligns with a double agency dynamic, where both GPs and LPs navigate competing incentives to balance transparency with reputational considerations.