Buy Outs Research Articles

Private Equity Fund Reporting Quality, External Monitors, and Third-Party Service Providers

ABSTRACT We describe variation in the reporting quality (i.e., accuracy and bias of reported net asset values (NAVs)) of private equity (PE) funds across types of external monitors (investors and auditors) and third-party service providers (valuation specialists, marketers, and administrators). In contrast to public markets, we find only limited evidence that reporting quality varies with the composition and types of investors in PE funds. We observe, however, that reporting quality varies with auditor involvement and the use of third-party service providers; these associations often differ across buyout (BO) and venture capital (VC) funds and from those observed in public markets. Our evidence is important to investors and regulators, especially now that PE supersedes public markets as the main vehicle to raise capital and as regulators increase their focus on private markets. Data Availability: Data used in this study are available from public sources listed in the paper. JEL Classifications: G1; G14; G30; M4; M41.

Risk-Adjustment of Buyout Funds Performance: A Bayesian Estimation Procedure

I examine the performance of 936 buyout (BO) funds incepted during 1980−2015 using Generalized Public Market Equivalent (GPME) proposed in Korteweg and Nagel (2016). The statistical inference implemented within the GMM framework suffers from the problem of poor identification. To solve this I introduce a Bayesian estimation step to calculate GPME. Even though, the uncertainty regarding how to choose the public market index for comparison remains. To address the benchmarking challenge I use a pricing kernel tailored specifically to the geographical and industrial characteristics of the fund. On average, BO funds do not show the outperformance after using this newly proposed approach.

Answers to Questions in Chapter 1 & 2 of Business Analysis & Valuation Using Financial Statements by Krishna, G. Palepu and Healy, Paul M.

The authors of the book “Business Analysis and Valuation Using Financial Statements” are Krishna G. Palepu, PhD and Paul M. Healy, PhD, ACA. Both are subject matter experts in business administration and professors at Harvard University. These professors in addition to being forces to reckon with as far as business research is concerned, are part of various academic boards and are authors of numerous academic books. Financial statements provide various forms of business analysis. These analyses range from: monitoring and judging firms’ performance relative to competitors; providing insights on the financial policies to be used; financial reports to investors including evaluation of new business to be acquired. They can be used to rate and evaluate companies before they are recommended to clients by security analysts; valuation of prospective buy outs, mergers and acquisitions and also come in handy in the evaluation of the creditworthiness of customers before they are given loans by banks (Healy & Krishna, 2012).

Risk Adjustment in Private Equity Returns

This article reviews empirical methods to assess risk and return in private equity. I discuss data and econometric issues for fund-level, deal-level, and publicly traded partnerships data. Risk-adjusted return estimates vary substantially by method, time period, and data source. The weight of evidence suggests that, relative to a similarly risky investment in the stock market, the average venture capital (VC) fund earned positive risk-adjusted returns before the turn of the millennium, but net-of-fee returns have been zero or even negative since. Average leveraged buyout (BO) investments have generally earned positive risk-adjusted returns both before and after fees, compared with a levered stock portfolio. Based on an expanded set of risk factors from the literature, VC resembles a small-growth investment, while BO loads mostly on value. I also discuss the empirical evidence on liquidity and idiosyncratic volatility risks.

Private equity characteristics and performance: An analysis of North American venture capital and buyout funds

AbstractThe paper investigates the relationship between fund performance and fund characteristics of North American private equity (PE) funds, by analyzing the interactions of fund size, fund sequence, and past fund performance on traditional fund return measures. The empirical evidence is based on both linear and polynomial regressions, on a sample of 345 venture capital (VC) and 411 buyout (BO) funds with vintage year over the period 1995–2010. We document a concave relationship between fund size and performance, persistence in PE performance, as well as a convex relationship between fund sequence and performance. We suggest both the optimal fund size and the optimal fund sequence number. Economic implications for investors and general partners are discussed as well.

Risk Adjustment in Private Equity Returns

This article reviews empirical methods to assess risk and return in private equity. I discuss data and econometric issues for fund-level, deal-level, and publicly traded partnerships data. Risk-adjusted return estimates vary substantially by method, time period, and data source. The weight of evidence suggests that, relative to a similarly risky investment in the stock market, the average venture capital (VC) fund earned positive risk-adjusted returns before the turn of the millennium, but net-of-fee returns have been zero or even negative since. Average leveraged buyout (BO) investments have generally earned positive risk-adjusted returns both before and after fees, compared with a levered stock portfolio. Based on an expanded set of risk factors from the literature, VC resembles a small-growth investment, while BO loads mostly on value. I also discuss the empirical evidence on liquidity and idiosyncratic volatility risks.

Private Equity Market in Recovery

Abstract In the past three decades there has been an increasing role of Private Equity (PE) industry in the financing of enterprises especially in case of firms that have great growth potential but are in need of external financing. Via providing financing for these enterprises PE can boost economic growth. On the other hand the different subsets of PE like Venture Capital (VC) and Buyout (BO) funds appear as an important investment class and the return characteristics of these asset classes is an indicator of the performance of the whole PE industry. The authors in their earlier works focused on the history of the return characteristics of the funds in the US and in Europe found different trends and features in the two regions with regards to the different asset classes. In this paper the authors focus on the current progress of PE industry in Europe and in the US and examine the recovery of the industry from the recession of 2008. The current trends are consistent with our former findings. In average the returns of BO funds exceeded the returns of VC funds in the US as well as in Europe. Not just according to the absolute value of the returns, but also according to its risk-return tradeoff BO seemed to be a preferable investment. The gap between the performances of BO funds was not as significant as the difference of VC funds. While the recession of 2008 affected negatively the returns of PE, the ‘dotcom’ boom of the millennia had much higher impact on the industry, and our finding is that PE returns are on a recovery course.

The employment consequences of private equity acquisitions: The case of institutional buy outs

There is a growing controversy as to the impact of private equity acquisitions, especially in terms of their impact on employment and subsequent organizational performance. It has been suggested that closer owner supervision and the injection of a new management team revitalize the acquired organization and unlock dormant capabilities and value. However, both politicians and trade unionists suggest that private equity acquirers may significantly reallocate value away from employees to short term investors, typically through layoffs and reduced wages, which may undermine future organizational sustainability. This article investigates this in the context of a sample of institutional buy outs (IBOs) undertaken in the UK between 1997 and 2006. Specifically we examine the impact of IBOs on both employment and remuneration against two control groups of non-acquired firms. In designing our study we follow the empirical approach taken by Conyon et al. (2001, 2002) in investigating the employment consequences of regular takeovers. Our main finding is a significant loss in employment in firms subject to an IBO in the year immediately following the acquisition as well as lower wage rates, when compared to either of the two control groups. Furthermore, we find no evidence of a subsequent improvement either in productivity or profitability in the acquired businesses.

Skill and Luck in Private Equity Performance

We evaluate the performance of private equity (PE) funds, using a variance decomposition model to separate skill from luck. We find a large amount of long-term persistence, and skilled PE firms outperform by 7% to 8% annually. But this performance is noisy, with a large amount of luck, so top-quartile performance does not necessarily imply top-quartile skills, making it difficult for investors (LPs) to identify skilled PE firms. Buyout (BO) firms show the largest skill differences, implying the greatest long-term persistence. Venture capital (VC) performance is the most noisy, making good VC firms hardest to identify, and implying the smallest amount of investable persistence.

Exits, Performance, and Late Stage Private Equity: the Case of UK Management Buy‐outs

Abstract Using a hand‐collected dataset of 1,225 buy‐outs, we examine post buy‐out and post exit long term abnormal operating performance of UK management buy‐outs, during the period 1980–2009. Our univariate and panel data analysis of post buy‐out performance conclusively show positive changes in output. We also find strong evidence for improvements in employment and output and a lack of significant changes in efficiency and profitability following initial public offerings (IPO) exits. IPOs from the main London Stock Exchange (LSE) market outperform their counterparts from the Alternative Investment Market (AIM) only in terms of changes in output. For secondary management buy outs (SMBOs), performance declines during the first buy‐out but in the second buy‐out performance stabilises until year three, after which profitability and efficiency fall while employment increases. Although private equity (PE) backed buy‐outs do not exhibit either post buy‐out or post exit underperformance, they fail to over‐perform their non‐PE backed counterparts. In the subsample of buy‐outs exiting via IPOs on the AIM, PE firms do not outperform non‐PE buy‐outs. Our findings highlight the importance of tracing the overall performance of buy‐outs over a longer period and controlling for sample selection bias related to the provision of PE backing.

The Economics of Private Equity Funds

This article analyzes the economics of the private equity industry using a novel model and dataset. We obtain data from a large investor in private equity funds, with detailed records on 238 funds raised between 1993 and 2006. We build a model to estimate the expected revenue to managers as a function of their investor contracts, and we test how this estimated revenue varies across the characteristics of our sample funds. Among our sample funds, about two-thirds of expected revenue comes from fixed-revenue components that are not sensitive to performance. We find sharp differences between venture capital (VC) and buyout (BO) funds. BO managers build on their prior experience by increasing the size of their funds faster than VC managers do. This leads to significantly higher revenue per partner and per professional in later BO funds. The results suggest that the BO business is more scalable than the VC business and that past success has a differential impact on the terms of their future funds.

Comparative Analysis of Project Delivery Systems Cost Performance in Pacific Northwest Public Schools

Alternative project delivery systems such as construction management at risk (CMR) are increasingly used in public school construction in the United States. CMR is expected to benefit owners with a guaranteed maximum price (GMP), decreased change order cost, and increased cost “certainty.” This paper empirically compares cost growth performance of the CMR and design-bid-build (DBB) methods in Pacific Northwest public school projects. Data were collected from state records and previous studies on 297 completed schools in Oregon and Washington. The analysis of the data shows no statistically significant difference between CMR and DBB in construction change order costs, school project costs exceeding the GMP in 75% of the cases, and a statistically significant difference in cost growth between CMR and DBB projects during buy out, making CMR projects less efficient at controlling cost growth at buy out. These results counter some of the traditional expectations of the CMR delivery method.

Education, Ethics and Knowledge Deficits in Clinical Pharmacogenetics

Whatever one’s view on the likelihood of pharmacogenomics moving into widespread clinical practice, it is hard to deny that this area of research has been subject to some of the most extensive and optimistic expectations seen in modern bioscience. Of course there have been such ‘bubbles of optimism’ in the past around technologies such as monoclonal antibodies, but nothing quite like the exuberance that has developed around pharmacogenetics. However, despite this excitement on the part of scientific, industrial, political and even bioethical authorities [1], the tone of many recent opinion pieces by leaders in the field has been to reduce expectations and to tone down the hype. For example, Klaus Lindpainter has noted that: “Pharmacogenetics and pharmacogenomics... are commonly touted as heralding a ‘revolution’ in medicine, yet as soon as one begins to probe more carefully, little substance is yet to be found to support these enthusiastic claims” [2]. There are various reasons for this increased caution. At the industrial level, the constant reshaping, mergers and buy outs within the sector have created instability and uncertainty, as evidenced by the high ‘attrition rate’ among small firms specializing in pharmacogenetics [101]. Another reason is that moving the results of pharmacogenetic research from research settings into clinical practice has proved to be far more difficult than might have been anticipated [3]. One way of viewing this shortfall of clinical pharmacogenetics is to suggest that the problem lies with clinicians: their lack of knowledge regarding this technology leads to resistance to change and an unwillingness to adopt approaches that might benefit their patients. To be fair, this merely echoes concerns that have been raised regarding the clinical take-up of genetics as a whole [4]. However, the suggestion that this is a generally held view among supporters of pharmacogenetics is supported by the constant call for the ‘education’ of clinicians, policymakers and the public, to prevent irrational rejection of such a useful technology [5,6]. Such thinking, which posits education as the solution to people’s ambivalence towards new technologies, has been labeled the ‘deficit model’ of public understanding of science and is widely discredited among social scientists researching in this area. In this perspective, I wish to suggest that although education is important, and may well impact on the clinical uptake of pharmacogentics, there are a number of other complex nontechnical issues that may play just as important a role in how pharmacogenetics moves into the clinic. The focus of this perspective will be on one such factor, clinicians’ ‘indigenous morality’ [7] and how it can impact on the clinical uptake of pharmacogenetics.

The Impact of Bid Defences in Hostile Acquisitions

An array of defence strategies is available to help companies defend themselves against unwelcome takeover attempts. However, such takeover defences have been the subject of some controversy, both in terms of their motivations and their effectiveness. This paper presents an empirical investigation into the use and impact of post-bid takeover defences within recent UK hostile acquisitions. Specifically, using data from 56 contested takeover approaches, the study explores the impact of individual defence tactics on the eventual outcome of the takeover attempt, the bid premium offered to shareholders, and the level of executive retention within the target company. Statistical analysis reveals that ‘white knights’ and ‘management buy outs’ were the most effective takeover defences and suggests that other commonly employed defence tactics, including the lobbying of stakeholders and regulatory appeals, have a weak and indecisive impact on bid outcome. Furthermore, once in a contested situation, the capacity of executives to use takeover defences either to entrench themselves or to boost the bid premium for shareholders was found to be limited. The findings provide important insights for executives faced with a takeover approach.

The geography of venture capital investments in the UK

The role of venture capital in economic development increasingly is recognized as central to the development of an entrepreneurial economy. However, the supply of venture capital is not distributed evenly across the space economy. In the UK, evidence for the 1980s demonstrated that venture capital investments were highly concentrated in Greater London and the South East, reinforcing the existing patterns of regional concentration of economic activity. This paper reviews the regional distribution of venture capital investments in the UK in the 1990s, a period of massive growth in venture capital investment activity. It concludes that the regional concentration of venture capital investment has been considerably reduced since the 1980s. However, more detailed analysis of the data demonstrates that this shift towards a less unequal regional distribution has been driven by so–called ‘merchant’ venture capital – investments in large–scale management buy–outs and buy–ins which facilitate corporate restructuring through ownership change and often have adverse consequences for employment. ‘Classic’ venture capital – investments in young entrepreneurial companies with high growth potential – remains highly concentrated in London and the South East, and also in Scotland. This reflects both supply– and demand–side factors. The Government’s new regional venture capital funds are unlikely to be effective in closing this regional finance gap. An alternative approach to intervention, in the context of the increasing globalization of venture capital investments, is to seek to attract venture capital money and expertise from elsewhere.

Post–Privatization Effects of Management and Employee Buy–outs

Management and employee buy–outs have played a significant role in the privatization of state–owned enterprises. Key research and policy issues are raised concerning whether insider ownership promotes or impedes restructuring and adaptation. This paper reviews and synthesizes studies of the effects of privatization management and employee buy–outs in both developed and transition economies. Trends in privatization buy–outs and conceptual issues concerning the expected effects of privatization buy–outs both in terms of performance and survival are discussed. A review of empirical evidence is presented in terms of the impact of buy–outs on employee attitudes, human resource management, strategy and restructuring, financial and economic performance, together with fresh evidence on survival. Privatization buy–outs can lead to significant restructuring but their impact depends on institutional context and policy. Restructuring may be greater where insiders purchase shares rather than acquiring them virtually free through voucher programmes.

P art-Load Cogeneration Technology Meets Chilled Water and Steam Requirements

Louisiana State University's Energy Savings Performance Con-tract with CESfWay was a groundbreaking project that applied part-load cogeneration technology to a large university campus to meetchilled water and steam requirements for expansion needs. Simulta-neously , the project provided these utilities at no additional out ofpocket cost to the institution by using the innovative financingmechanism of performance contracting, in which project savings pa yfor the investment.In addition , the work is performed via a cogeneration s ystemoperating most of the year at part-load. This mechanical cogenerationproject could also be termed a "thermal cogeneration" project, as itpro vides a dual thermal benefit from a single input energy source.Not only did the project achieve the projected energ y sa vings,but the sa vings proved to be so dependable that the Universit y optedfor an early bu yout of the project from CES/Way in 1994, after onl yabout two years of documented savings.

Die neuen Unternehmer: Eine multivariate Analyse der Übernahmemotive bei ostdeutschen MBOs

During the privatization in the Neue Bundeslander the instrument of management-buy-outs was among others employed. As an analysis of the dominant motives for management-buy-outs showed, the East German management buy outs are motivated mainly by security aspects. In established West European market economies usually the most important motives for management-buy-outs are of an entrepreneurial character. The results of a factor analysis composed of all motives lead to four motive sets. In assessing the effects of the motives for the management-buy-outs, it could be shown that the performance of those management-buy-outs motivated primarily by individual employment security motives developed rather poorly in comparison.

Privatisation and buy‐outs in the USSR

THE NEED FOR FUNDAMENTAL REFORM in the countries of Central and Eastern Europe is well recognised; so too are the problems of transition to a market economy.1 Nowhere is this more evident than in the USSR, which is under pressure from Western governments and lenders to harden and accelerate economic reforms. Great problems exist in respect of a need for major capital investment, the development of managerial and entrepreneurial skills, the extent and nature of acceptable foreign ownership and the form that privatisation of state-owned assets is to take. Key roles are assigned to Western assistance, such as business-related training and various forms of direct financial investment.2 The applicability of privatisation experience in the West has also been addressed.3 In 1991 the privatisation of state enterprises in Central and Eastern Europe is underway and is spreading to include the USSR, although progress is being slowed by a variety of implementational and institutional problems. Commentators are also particularly divided on the issue of whether the process of privatisation should be gradual, to avoid social collapse, or rapid, to prevent the opponents of reform from gathering their powers of obstruction.4 An important form of privatisation in the West, especially for small and medium-sized enterprises, has been employee and management buy-outs. The definition of a buy-out (BO) is necessarily vague and subjective. A management buy-out (MBO) occurs when incumbent managers acquire a controlling interest in the firm that employed them, and an employee buy-out (EBO) exists when a controlling interest is acquired by employees outside the management. Unlike the labour co-operative, all BOs retain an element of vertical control by a management team.