Spreading Sunshine in Private Equity: Financial Intermediation and Regulatory Oversight

This paper studies the impact of regulatory oversight on market transparency and financial intermediation in private equity (PE) markets. I use regulatory filings to examine an unanticipated reform that substantially expanded the regulatory oversight of PE fund advisers reducing information frictions for institutional investors. The enhanced regulatory oversight increases investors' PE market participation while reducing their incentives to bypass PE fund intermediation. Investors' direct investments tend to target larger, more mature, and less innovative companies relative to investments made through PE funds. These findings highlight the limits of market discipline and demonstrate the positive role of regulatory oversight in improving intermediation in PE markets.