Money chasing deals? The impact of fund inflows on private equity valuation

We show that inflows of capital into venture funds increase the valuation of these funds' new investments. This effect is robust to (i) controlling for firm characteristics and public market valuations, (ii) examining first differences, and (iii) using inflows into leveraged buyout funds as an instrumental variable. Interaction terms suggest that the impact of venture capital inflows on prices is greatest in states with the most venture capital activity. Changes in valuations do not appear related to the ultimate success of these firms. The findings are consistent with competition for a limited number of attractive investments being responsible for rising prices. (C) 2000 Elsevier Science S.A, All rights reserved, JEL classification. G24; G12.