Intrastate Investment and Private Equity Returns

Abstract

This paper examines the effect of intrastate investment on private equity returns. Private equity firms that invest in companies that are located in their own state are likely to benefit from geographically focused networks, lower monitoring costs, and other similar advantages, resulting in superior rates of return. A theoretical model and empirical analysis support this conclusion. Using an economic model based on the assumptions of Cournot competition, the paper shows that lower monitoring costs and informational advantages lead to higher rates of returns for in-state investments. However, the impact of intrastate investment on returns is largely dependent on a state’s private equity market concentration. In states that have a low concentration of private equity firms, intrastate investment has a substantial positive impact on returns. As the concentration increases, the marginal effect of in-state investment steadily declines.