Institutional Reinvestments in Private Equity Funds as a Double-Edged Sword: The Role of the Status Quo Bias

Abstract

Reinvestments can be a rational investment strategy for institutional investors in private equity funds to make use of inside information from previous funds or to get preferred access to restricted funds. However, reinvestments could also be motivated by a status quo bias, which describes a behavioral tendency to pursue the status quo option disproportionately often. This paper investigates the role of the status quo bias for institutional investments in private equity funds. Based on our fieldwork and a unique data set of 136 institutional investors and private equity firms in Germany, we show that institutional investors strongly prefer private equity firms in which they have invested before. The magnitude of the status quo bias depends on the nature of the investment opportunity and certain investor characteristics. Our results suggest that reinvestments are a double-edged sword for institutional investors that can result from a rational investment strategy, but also from an irrational investment behavior.

Keywords:

• Private equity
• Investment decisions
• Institutional investors
• Status quo bias
• Decision biases