You Needn't Be the First Investor There: First-Mover Disadvantages in Emerging Private Equity Markets

Abstract

Early movers into emerging private equity markets may capitalize on growth opportunities and build-up networks. However, the deal-making conditions might not (yet) be favorable for the pioneers and they could lack local experience. I support this latter conjecture by analyzing a unique hand-collected dataset on emerging private equity market transactions. From 1,157 deals in 86 host countries between 1973 and 2009 I find that “waiting and learning pays”. Controlling for opportunity cost of capital, cross currency rate fluctuations, GDP growth over the holding periods, for liquidity of the exit markets, and for socio-economic factors, such as a country’s innovation capacity, its legal quality, its human capital and labor market frictions, the analyses reveal that early transactions underperform the later ones. I interpret this as a result from learning benefits and from improvements of the deal-making environment over time. The learning benefits are stronger if investors are located in the country of the investee firm.