Chinese Private Equity Fund Share Restriction And Performance

This paper examines the effect of private equity fund share restrictions on fund performance in the Chinese market.Share restrictions in liability side mainly refer to provisions imposed by funds that limit the liquidity of investors,and restrictions in asset side concern the liquidity of fund assets.By using monthly data from 2010 to 2017,the paper finds that the excess returns of funds with lockup restrictions are significantly higher than those of nonlockup funds.The premium in the sample is about 7% per annum.A concave relation is found between minimum investment amount and performance,although it’s not significant statistically.The frequencies of opening purchase and redemption are close to each other in the same fund,and their coefficients are nearly opposite.Therefore,these two variables as a whole make an offset difference on fund excess returns and can be neglected in the economic sense.After controlling for share restrictions,the intercepts decrease and even become negative.Share restrictions in liability side allow private equity funds to efficiently manage illiquid assets and bring higher expect returns as compensation for investors’ holding less liquid funds.As for share restrictions in asset side,two main variables,trade suspension of bulk-holding stocks and the time span of suspension,have a negative effect on fund performance,which is more obvious in stock funds.Compared with funds with lockup restriction,those without lockups suffer from stock trade suspension more seriously,and this kind of effect is the most significant in 2 months after resumption of trading.The results show that when funds’ asset liquidity is facing exogenous shocks,share restrictions,which help managers optimize assets allocation,can reduce negative impacts and recover some losses.Finally,this paper provides some specific suggestions according to the research conclusions.Private equity funds can set share restrictions in liability side on the basis of investment strategies,funds’ amounts and other factors,in order to gain illiquidity premium and improve performance.Also,long-term investors should give priority to those funds which impose share restrictions such as lockup periods.Theoretically,these products can earn higher excess returns on average.