Portfolio Companies Research Articles

Psychological and Behavioural Drivers of Short-Term Investment Intentions

Analysing the factors that influence the short-term investment intentions of investors is critical for investment institutions. If investment institutions are informed about these factors they can create a framework to more accurately profile their clients to provide clients with the desired liquidity, maturity dates and desired risk and return expectations. Risk tolerance is one of the elements that has been used over time to profile investors, however, this paper found that other factors should also be included. Therefore, this article aimed to determine what drives investors’ short-term investment intentions following a more sociological and behavioural approach by including investor personality traits, behavioural finance biases and investors’ risk tolerance behaviour. Secondary data was obtained from a private investment firm surveying private investors in South Africa. Male investors were also more likely to invest in the short-term compared to female investors. Several personality traits, risk tolerance and a single behavioural finance bias were found to influence investor intentions to invest in the short-term. It is therefore recommended to portfolio management companies that several sociological and behavioural variables do explain whether investors will be willing to invest in short-term or more long-term investment portfolios.

Process Alpha: How to Construct and Manage Optimized Venture Portfolios

The author provides a specific strategy to design and manage an optimal venture investment strategy, regardless of the venture thesis. The author first discusses the contributing factors that have contributed to the consistent underperformance of the median venture capital fund performance and highlights the recent research findings and actions taken by Sequoia Capital to frame the direction of the innovation in the venture fund model. He then offers specific examples of how an optimal fund would be structured and managed, presuming there is proper reporting and analytics available on the individual portfolio companies. Last, the author makes a case for professionalizing the venture industry with recognized training, curriculum, and a certification and continuing education requirements to parallel other recognized professions.

Testing multi-factor asset pricing models in Borsa Istanbul

This study aims to test the validity of multi-factor asset pricing models on the portfolios of non-financial companies whose shares are traded on Borsa Istanbul and to identify the model with the best explanatory power. Accordingly, the relationships between annual book-to-market equity ratio, firm size, market portfolio return, return on capital, operating profitability, momentum and value-added intellectual coefficient between 2008-2019 were analyzed using panel data analysis. As a result of the analyses made, it has been observed that Fama French's three and five factors, Carhart (momentum), q-factor, and suggested models are successful in explaining the returns of portfolios formed by non-financial companies. Furthermore, according to the GRS-F test statistic, the q-factor model was found to have higher explanatory power than other models.

Employee Satisfaction and Long-Run Stock Returns, 1984–2020

Economic theory predicts that (in the absence of mispricing) the excess return to socially responsible businesses is negative in equilibrium. In contrast, using the state-of-art empirical models and a sample spanning four decades (1984–2020), an equal-weighted portfolio of companies that treat their employees the best earns an excess return of 2% to 2.7% per year. The estimated alphas are positive in most periods within the sample (with no upward or downward trend) and are particularly large during crisis periods. Overall, the results suggest that the stock market (still) undervalues employee satisfaction.

IMPLEMENTATION OF PROCEDURES FOR VERIFICATION OF THE STATE OF RELIABILITY OF CONTRACTORS IN THE MODEL OF ADMINISTRATION OF CONSTRUCTION PROJECTS

The article outlines the areas of improvement of existing approaches and analytical technologies for identifying the state of the microenvironment of the construction project and its leading participants. The theoretical basis for the functioning of development as an innovation and investment infrastructure of the construction complex is highlighted. The relevance of determining the success potential of the management decision and the success potential of the investment and construction project development is substantiated. Factors and risks that contribute to the failure of development projects in the construction industry are reflected. The results of the work allow top management of contractors to effectively monitor, structure and maneuver the assets of contractors in the process of their operations, provide a reasonable opportunity to adjust the economic strategy and parameters of the production portfolio of construction companies. The substantiation of the content of the leading functions of the "organizational structure" as a temporary enterprise for the organization of construction and development of DBP type (construction project developer) includes: management of logistics, preparation and construction processes, ensuring the transformation of resources of the customer and its institutional partners; coordination and administrative-regulatory function, which is to ensure communications and institutional and organizational design of relations between institutional participants and executors of the project in the form of agreements, contracts and a functioning directorate for project administration; directing the development system and organizational structure of management to timely identify threats to the progress of preparation and construction of facilities. The adaptive methodology of organizational and technological development of the project cycle and its administration by a temporary development company is justified in such a way as to adjust the content of business processes in the middle of the structure to the essence of tasks and work life cycle. The methodology harmonizes the requirements and methodological approaches of the development system in construction with the requirements and standards set by the Project Management Institute, which includes the inclusion of tools for construction, in addition to BIM-modules, and special visual components - "sensitivity maps".

Owned Social Media Advertising: Cannibalization and Competition

Businesses often rely on owned social media (brand pages on networking sites) to advertise their brands, and multibrand companies frequently manage individual brand pages, rather than representing all company brands together on one firm page. Because advertising results in cross-brand effects, companies need to understand how such effects manifest across their pages. This study investigates the cross effects of owned social media advertising by distinguishing between intra- and interbrand portfolio scenarios. It also compares the effects between television advertising and owned social media advertising. With a focus on the U.S. soft drink market, this study reveals that brand page advertising results in cannibalization within company portfolios, whereas positive spillover results from television advertising. The cross effects migrate to brands outside the portfolios, thereby intensifying competition. Accounting for the combined effects of cannibalization and competition reveals that owned social media increase portfolio demand more effectively than television advertising overall, which implies some key managerial recommendations for developing brand page strategies.

Premature listing and post-IPO venture capital refinancing

We examine why venture capital firms re-invest in portfolio companies also after the IPO. Companies are taken public earlier than optimal, resulting in lower post-IPO returns, and a greater likelihood of, and shorter time to, the first post-IPO VC refinancing.

The aromachology and possibilities of its application in a selected business entity

Aromachology studies the influence of odours on human behaviour and examines the relationship between feelings and emotions. The submitted paper deals with implementing a new marketing communication tool into practice and the possibilities of its use. Our research deals with the use of the human senses in marketing, where we take a closer look at the sense of smell because it has an important position in the human mind and life. It can awaken our memories and create emotions and improve the mood and often unconsciously influence consumer behaviour. The paper is divided into two parts. The first one aims at the theoretical introduction devoted to basic concepts such as aromachology and aroma marketing. This knowledge was subsequently applied directly to the surveyed company in the results part. The research subject is the influence of aromas on the emotional side of consumer behaviour which is influenced by all stimuli around us. Based on the research, we identified the most suitable aroma category that the company could use in the future. We have developed proposals and recommendations that could help increase awareness of a new product in the company's portfolio through unconscious communication at the point of sale, which will bring the gradual implementation of this marketing tool into practice. Two questionnaires were used – the first one aimed to gain basic information about consumers and their consumer behaviour. The second one was realized as a blind review of selected aromas using facial biometrics. Based on both surveys, we can conclude that introducing a specific aroma in the company certainly could influence the sale of a new product, a chocolate cake.

Risk assessment of equity-based conventional and islamic stock portfolios

This study attempts to explore and compare the risk-return relationship and risk premia of the two parallel financial systems in Pakistan, i.e. Islamic (Sharia-compliant) and Conventional (non- Islamic) using two different asset pricing models, namely CAPM and Fama and French (FF) three-factor model. After initial classification, both systems have been split into four subcategories. So conventional stocks portfolios of banks, insurance companies, investment banks, and mutual funds have been compared with Islamic banks, leasing, Modarabah, and Islamic mutual funds stocks in terms of return, risk, and conditional volatility. These results depict significant variations in returns and/or risks (unconditional variance) between these comparable financial systems. The risk premia of conventional stocks are considerably higher than their Islamic compeers. The hypothesis of efficient risk-return relationship is supported for all portfolios, but the relationship is much stronger for the Islamic stocks as compared to the conventional ones. Moreover, the lower reward of Islamic stocks is associated with lesser conditional volatility. The nonsynchronous effect and persistence in the volatility of returns are apparent in all stocks except Modarabah and Islamic mutual funds. Further, the impact of volatility clustering on returns of all stock portfolios is quite larger than external shock.

The monitoring role of venture capital on controllers' tunneling: Evidence from China

This paper provides evidence supporting the monitoring role of venture capital (VC) in mitigating controlling shareholders' tunneling behavior. We use the staggered introduction of bullet trains in China as shocks to travel time between VCs and portfolio companies, which increases VCs' involvement in portfolio companies' governance. Using a generalized difference-in-difference design, we find that the increased VC involvement induced by the opening of a bullet train route in a city decreases affected portfolio companies' inter-corporate loans by 0.4 percentage points (pp) and the probability of a company violating capital occupation by 6.2 pp. The effect of bullet train connectivity on VC monitoring is more pronounced for companies that are located in cities where are subjected to a larger extent of bullet train connectivity, companies that experience more problematic tunneling, and companies that have looser alternative governance mechanisms. Furthermore, we provide direct evidence supporting the effect of bullet train connectivity on VC involvement by showing that VC directors participate more in the committees and board meetings. Our paper contributes to the literature by providing a plausibly causal effect of VC monitoring on the conflict between the controlling and minority shareholders.

Private equity and Covid-19

We survey more than 200 private equity (PE) managers from firms with $1.9 trillion of assets under management (AUM) about their portfolio performance, decision-making and activities during the Covid-19 pandemic. Given that PE managers have significant incentives to maximize value, their actions during the pandemic should indicate what they perceive as being important for both the preservation and creation of value. PE managers believe that 40% of their portfolio companies are moderately negatively affected and 10% are very negatively affected by the pandemic. The private equity managers—both investment and operating partners—are actively engaged in the operations, governance, and financing in all of their current portfolio companies. These activities are more intensively pursued in those companies that have been more severely affected by the Covid-19 pandemic. As a result of the pandemic, they expect the performance of their existing funds to decline. They are more pessimistic about that decline than the venture capitalists (VCs) surveyed in Gompers et al. (2021). Despite the pandemic, private equity managers are seeking new investments. Rather than focusing on cost cutting, PE investors place a much greater weight on revenue growth for value creation. Relative to the 2012 survey results reported in Gompers, Kaplan, and Mukharlyamov (2016), they appear to give a larger equity stake to management teams and target somewhat lower returns.

Reconciling Limited Partners’ Cash-Flow Forecasting with the Look-Through for AIFs

This article aims to deal with two problems: (1) how to formally comply with the look-through requirement under various financial regulations and (2) how to address biases in financial reporting for Alternative Investment Funds (AIFs) investing in private equity and real assets. The approach suggested here aims to work within the confines of existing regulation and with the reporting data provided by the fund management industry already today. It aims to incorporate insights on portfolio companies gained by a look-through into a model of the fund’s cash-flows. Compared to traditional approaches based on historically observed cash-flows for comparable funds, such a look-through can increase the reliability of cash-flow projections and result in a better attribution of risk factors to the individual portfolio components. For this purpose, the author differentiates between a simple, enhanced, strong, and full look-through.

Syndication networks and company survival: evidence from European venture capital deals

ABSTRACT This study investigates the phenomenon of syndication in the venture capital industry. Investments conducted by syndicates are believed to have a better chance of being successful, which can be measured by the survival probability of portfolio companies or by successful exits. Using a novel and large dataset covering several countries, our analysis shows that investors’ strong network ties are associated with the success of portfolio companies in Europe. We also demonstrate differences in the association of network centrality with survival between different financing rounds, with the former being more important in early-stage investments and in the first round of financing. Furthermore, we show a strong association of investors’ network ties with the sales growth of portfolio companies before and after the deal, which is consistent in both selection and value-added channels. Finally, we explicitly account for the endogeneity of syndicate formation and show that the results hold if we instrument for venture firms’ network properties, as indicated by significant and correspondingly larger coefficients.

A method for performing a value assessment of a portfolio company during the venture stage of development using a selection matrix

Introduction. The evaluation of the value of companies that are recipients of venture capital investments is an integral part of the funding process. Determining the correct value assessment of a portfolio company allows calculating what share of the company’s equity will be received by a venture capital fund in exchange for investments. In this article we will study the most relevant methods for the value assessment of recipient companies during the venture stages of development. The purpose of the article is to create a selection matrix for determining the method of value assessment for a portfolio company during the venture stage of development, taking into account specific national features. Methodology. We used the following research methods and approaches: classification, induction and deduction, critical and logical analysis, generalisation, and structuring. Results. We systematised and described the operating results that companies in receipt of venture capital investments achieve during the venture stage of development and we also generalised financial determiners. Financial determiners that serve as the basis for the methods of value assessment of portfolio companies were identified through the generalisation of financial and operational results. It was established that there is no perfect method for the valuation of recently founded innovative companies that offer a unique product or service and do not have a developed market yet. As a result of the conducted study, we developed a method using a selection for the value assessment of a portfolio company. As compared to other existing methods, the suggested matrix is a systematic approach that allows choosing the methods of value assessment depending on the development stage of a recipient company's investment.

The Investment Game in Private Equity

Abstract Private equity investing and the relationship between the GP and the LPs are plagued with the risk of information asymmetries and agency costs, so the markets have developed several mechanisms to align the incentives of the funds and the investors, most importantly through disclosure and protections in limited partnership agreements. However, such agreements may not always deal with the most important asymmetries or agency conflicts, especially the hidden effort problem. From the fund’s perspective, there are also other relationships that affect its internal dynamics. They are the need for interest alignment between the fund (and the GP) and the managers of the portfolio companies, the risk of financial agency costs and the risk of strategic creditor actions. All of these relationships are regulated primarily by contracts. In this paper, I evaluate the game-theoretical framework, Investment Game, based on the analysis of the GP-LP investment-effort relationship supported by a brief analysis of the other relationships. I argue that, in most cases, the LPs are able to solve the GP effort maximisation problem making part of the fund regulation unnecessary. However, private ordering may not work in some cases. Despite these situations, the Investment Game enables, even when the LPs cannot affect the fund terms, an analysis of the GP effort level and the level of undisclosed private benefits. Therefore, the Investment Game also sets a framework for a data analysis of private equity investing.

Empirical examination of relationship between venture capital financing and profitability of portfolio companies in Uganda

In recent times, venture capital (VC) financing has evolved as an alternative feasible funding model for young innovative companies. Existing studies focus on whether VC enhances profitability. While helpful, this body of work does not address a critical question: whether VC firms are more profitable than non-VC firms. The co-existence of both VC and non VC firms in Africa provides an opportunity to address this question. Accordingly, this paper sought to extend the understanding of the relationship between VC financing and the profitability of portfolio companies in Uganda, a rapidly growing VC market. We utilised a mixed methods approach, which involved quantitative data collected from 68 key VC stakeholders, and qualitative data collected from 16 semi-structured face-to-face interviews. The results confirm the superior performance of VC-financed enterprises when compared to non-VC-financed enterprises. The study makes a vital contribution by offering a diversified framework for enterprise success. The framework will assist VC firms in evaluating and customising funding programmes that can propel early-stage firms’ success in Uganda, and in similar emerging economies. Secondly, our results contribute to extant knowledge about recent developments in Uganda’s VC industry and how it influences the profitability trends of SMEs, also in similar emerging economies.

Effectiveness of Investing in the Stocks of Renewable Energy Companies in Poland

Abstract Subject and purpose of work: This study investigates the effectiveness of equity investment in renewable energy companies. The aim of the research is to compare the effectiveness of investing in the stocks of companies from the conventional and renewable energy sector on the Warsaw Stock Exchange. Materials and methods: The research material consisted of the stock prices of selected energy companies listed on the Warsaw Stock Exchange’s Main Market and NewConnect. Representative investment portfolios were created and their average monthly logarithmic rates of return, standard deviations and Sharpe ratios for the period 2013–2020 were examined. Results: The portfolios of renewable energy companies were characterised by higher risk, but also higher average returns; as a result, they achieved higher risk-adjusted efficiency ratios than the portfolios of conventional energy companies. Conclusions: Shares in renewable energy companies, despite a significant risk, can be an attractive form of investment, which is crucial for privately financing the energy transformation in Poland.

The impact of hiring local managers on foreign venture capital performance: evidence from China

PurposeThis study examines whether recruitment of local managers helps foreign venture capital (VC) firms mitigate the liability of foreignness measured by cultural differences and improves their performance in relationship-based emerging markets such as China.Design/methodology/approachFrom a data set comprising 1,939 Chinese portfolio companies with first-round investments by 282 foreign lead VC firms during 2000–2015, the study tracks the outcome of each investment until the end of 2018 and collects the background information of partners of lead VC firms. A survival analysis using the Cox hazard model is conducted.FindingsCultural differences of the foreign VC's home country, when compared to China, positively influence the success of VC firms. Recruitment of local managers reinforces this positive influence. The influence of local manager recruitment is more pronounced for VC firms with politically connected local managers, during politically uncertain periods, in industries supported by the government, in provinces with high government intervention and in VC firms with decentralized decision rights given to local managers.Originality/valueThis research complements the international business literature on the advantages of hiring local managers and identifies the channels through which local managers help foreign VC firms obtain relationship-based resources. The findings also have practical implications for those foreign investors who intend to enter into relationship-based emerging markets.

Private Equity and Bank Capital Requirements: Evidence from European Firms

AbstractUsing firm‐level data from 16 euro‐area countries over 2008–2014, we investigate how the performance of bank‐affiliated private equity‐backed companies evolves after the European Banking Authority increased capital requirements for their parent banks. We find that portfolio companies connected to exposed banks reduce their level of investment and experience weaker asset growth, employment growth and profitability following the capital exercise. We further show that the effect is stronger for companies likely to face financial constraints. Finally, the findings indicate that the negative effect of the capital exercise is muted when the private equity sponsor is more experienced.

Выявление зависимости между финансовыми инструментами для структурирования венчурного раунда и инвестиционной стадией развития портфельной компании

The purpose of this article is to identify the financial instruments that a venture capital fund uses when structuring а round of financing and the investment stages of development of a portfolio company. Based on a systematic literature review we investigated the portfolio companies’ investment stages, at which venture capital investments are made: seed stage, start-up stage, early stage, expansion stage. As a result of this study the definition of “venture investments” has been clarified. This article examines the financial instruments that venture capital funds use to structure a deal with portfolio companies’ founders on the venture stages of development. It has been established that the choice of financial instruments is the result of the negotiation process between the venture capital fund and new venture founders and depends on the risk of failure, which is determined by the investment stage of the portfolio company. Moreover, shortcomings of the national legislative regulation system were highlighted, and positive trends were noted in the national rule-making process – the adoption of a federal law that establishes the procedure for using a convertible loan. The possible ways of structuring the transaction between the founders and domestic venture capital funds formed under investment partnership agreements were identified. The results obtained can be used to build a venture infrastructure with operating mechanisms that are understandable for foreign investors.