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A new perspective on private equity stage financing: evidence from investments in infrastructure

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  • Josephine Gemson
  • Thillai Rajan Annamalai
Abstract
This paper examines the staging of investments when private equity (PE) invests in the infrastructure sector. This sector is characterized by large upfront investment requirements and non-recourse deal structures. Over the last two decades, it has witnessed increasing PE investment activity. PE firms have the option to finance infrastructure project by infusing capital at once, or by staging infusions through multiple investments. In case the PE firm decides to disburse the capital in multiple investments, it creates the staging function, a mechanism successfully used in the past to combat risk and uncertainty. This study hypothesizes that the decision to stage investment is a response to the factors that influence infrastructure deals including institutional and financial environments, project structure, and reputation of the PE firm. This paper examines 358 worldwide infrastructure deals from 1990 to 2009 with PE investments of US$9.74 billion to analyze the choice for, the motives behind, the duration between, and the determinants of staging. We find that developing/transition economies and markets characterized by high inflation and interest rates increases PE propensity to stage. Further deals with larger investment sizes and younger investee companies pose increased risks, and PE firms seem to use their prior infrastructure experience and bargaining power to stage financing. Our results also confirm that long-term relationships between the PE firm and the investee company are advantageous to both parties. We believe that the positive results acquired through the PE staging strategy will help perpetuate it as one of the best tools available for PE investing in the infrastructure sector.

Suggested Citation

  • Josephine Gemson & Thillai Rajan Annamalai, 2015. "A new perspective on private equity stage financing: evidence from investments in infrastructure," Venture Capital, Taylor & Francis Journals, vol. 17(4), pages 299-325, October.
    • Handle: RePEc:taf:veecee:v:17:y:2015:i:4:p:299-325
    DOI: 10.1080/13691066.2015.1052193
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    References listed on IDEAS

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    1. Christian Hopp, 2008. "Nothing Ventured - Nothing Gained? Empirical Evidence on Venture Capital Financing in Switzerland�," TWI Research Paper Series 23, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
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    Cited by:

    1. Wehrle, Rebecca & Wiens, Marcus & Schultmann, Frank, 2024. "Evaluation of the potential of infrastructure funds: The case of inland waterways in Germany," Technological Forecasting and Social Change, Elsevier, vol. 208(C).
    2. Dominic, James & Gopalaswamy, Arun Kumar, 2019. "Is the venture capital market liquid? Evidence from India," Global Finance Journal, Elsevier, vol. 41(C), pages 146-157.
    3. Gemson, Josephine, 2021. "Private company acquisitions in the market for corporate control: A comparison between private equity and corporate acquirers," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 342-357.

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