PE Investors Research Articles

The performance of private equity portfolio companies during the COVID-19 pandemic

We study the performance of PE-backed companies during the COVID-19 pandemic. Our findings suggest that, on average, PE-backed firms were more resilient compared to closely matched industry peers during the pandemic. However, this outperformance is of a smaller magnitude than during the pre-pandemic non-crisis period, suggesting that the outperformance is driven by investor selection of target firms ex ante, rather than active support mechanisms. The outperformance during the pandemic is found to be insignificant among firms which were the most vulnerable at the onset of the pandemic, and firms in the most exposed industries. These more vulnerable firms appear to have been less active in obtaining additional financing during the pandemic, and consequently, suffered a significantly higher incidence of distress. However, non-PE-backed firms in distress had a higher incidence of liquidation, while PE-owned firms more often negotiated formally with creditors to continue trading. Our analysis shines light on the role of PE investors during a large, exogenous shock, and suggests that, in the case of the pandemic, their adept target selection may help to explain the outperformance more so than their actions to protect vulnerable firms in a crisis.

Same owner, different impact: How responses to performance feedback differ across a private equity investor's portfolio firms

AbstractResearch SummaryPrivate equity (PE) investors invest in a portfolio of firms, setting new, ambitious performance aspirations and providing monitoring and value‐adding services to help management attain these aspirations. Integrating a behavioral theory of the firm and corporate governance perspective, this study investigates how portfolio firms respond to performance feedback, considering heterogeneity in PE investors' incentives and influence toward a given portfolio firm's strategic actions. Using unique data from a PE investor including direct aspirations measures, we find that (1) portfolio firms' performance relative to aspirations, and (2) the PE investor's relative investment amounts and experience of PE‐appointed board members, interact to affect the distinct growth strategies (i.e., internal capital investments or external acquisitions) its portfolio firms pursue.Managerial SummaryA PE investor may guide its portfolio firms differently. Incentives to intervene should be larger in case of larger investments, and influence should be more extensive in case of more senior PE board representatives. In this study, we examine how a PE investor's varying incentives and influence affect how PE‐backed firms strategically react to underperformance and overperformance. We find that a PE investor pushes for capital investments but deters acquisitions as performance shortfalls increase in a portfolio firm, when they have made larger investments and appointed more senior board members. In case of overperformance, a PE investor pushes toward acquisitions (and against capital investments) when they have invested more. Surprisingly, the opposite holds in case of more senior board members.

Healthcare as asset: Private equity investment and the changing geographies of care in the United States

This article considers what private equity’s (PE) growing interest in the healthcare industry means for the geographies of healthcare provisioning in the United States. PE firms invest in healthcare providers and spaces, treating these investments similar to their traditional investment assets, which subjects healthcare, a vital service, to often austere management tactics and financial engineering. Our work builds on critiques emerging from the healthcare community about the negative effects – and even dangers - of this mode of funding. A geographical reading raises questions about this form of investment that are simultaneously political, ethical, and practical: whose sickness provides profit, where and how is care provisioned, and what impacts--if any-- does this form of investment have on the quality of care and life? To answer these questions, we mobilise feminist geographical approaches to finance and care to consider the impacts of PE investments on the provisioning of US healthcare. Specifically, this article examines urgent care centers (UCCs) and telehealth in the United State. We conduct a content and discourse analysis of investor, analyst, and industry documents, examining dealmaking in the sector and asking how PE investors understand the healthcare sector as a lucrative asset that they can subject to traditional PE investment strategies. In so doing, we illustrate how private equity both relies on old practices and reinvents itself as it seeks profits in the healthcare sector. Overall, we call for more attention to the effects of PE investment on the geographies and quality of healthcare.

Maximizing Operational Efficiency in Healthcare

Private equity investment in the healthcare sector has emerged as a powerful tool for growth and development. Healthcare organizations are increasingly turning to PE investors for strategic, operational, and financial expertise, as well as to capital funds to scale-up operations. The case study of Surya Hospitals illustrates one such successful partnership between a PE investor and a healthcare organization. The investment from SeaLink Capital Partners enabled the promoters of Surya Hospital to take the business to the next level. Private equity investments have the potential to revolutionize the way healthcare organizations do business. By creating win-win situations for all stakeholders, PE investments are helping to drive innovation and create value for the industry at large. The case study of Surya Hospitals demonstrates this potential and could be a template for other healthcare service organizations looking to leverage private equity investments.

New Favorite of Global PE Investors, Balanced with Growth and Risk-Return Profile

New Favorite of Global PE Investors, Balanced with Growth and Risk-Return Profile

How Private Equity-Backed Buyout Contracts Shape Corporate Governance

This paper explores how contracts in private equity-backed buyouts shape corporate governance in portfolio companies. Drawing upon agency theory and incomplete contracting theory, 34 actual contracts are analysed in detail. Contracts focus on reducing information asymmetries, mainly during the due diligence process, and aligning the goals of managers and PE investors during the investment period and at exit. Residual powers and contingencies are mainly used to deal with incomplete contract designs due to uncertainties. While some contractual mechanisms are comparable to those used in VC contracts, others are idiosyncratic to PE.

Private Equity Exit Strategies and Profitability During the Global Pandemic: Evidence from Around the World

AbstractPrivate equity (PE) exit strategy is important for investors as a planned and effective exit strategy improves the chance of realizing higher profit. In this paper, we examine how PE exit strategies are being affected by the on‐going global pandemic. The current COVID‐19 pandemic has created unprecedented exogenous shocks to nearly every economy and it is important to see how this uncertainty affects economic activities such as the PE exit decision. Using 20 years of PE fund data from across 79 countries, we find that the current COVID‐19 global pandemic has significantly affected the PE exit decision and the effect is stronger than that of the recent financial crisis. Out of all the exit strategies, acquisition is the most popular, and COVID‐19 exerts a significant negative impact on the others. We also find that COVID‐19 has negatively affected deal values across all the exit strategies, limiting the profit potential for investors. Moreover, the paper provides evidence that PE investors tend to wait for a good time to exit rather than rushing to exit during an uncertain time such as this global pandemic. Our results are robust for various alternative econometric specifications.

Venture Capital and Private Equity Funds as Source of Financing Enterprises in Poland

Summary Subject and purpose of work: The main issue of the work is to present the essence of venture capital, i.e. Venture Capital funds and Private Equity funds. The aim of the article is to indicate the size of the share and the role of funds in financing enterprises located in Poland. The time horizon of the presented data covers the years 2012-2019. Materials and methods: The material for analysis is available statistical data, reports of commercial companies and other entities researching the size of the Venture Capital and Private Equity sector in Poland. For the purposes of the study, the literature on the subject was used as well as the data of: Narodowy Centrum Badań i Rozwoju, KPMG Sp. z o.o., the State Development Fund, the Startup Poland Foundation and the European Association of Venture Capital and Private Equity Investors. The method of analysis and criticism of the literature and the method of examining documents were used. Results: The research carried out in Poland makes it possible to assess the size of the implemented venture capital investments, i.e. VC and PE funds, over the years 2012-2019. The presented data indicate that the share of funds in financing Polish enterprises has a variable tendency. The percentage share of VC and PE investors in Europe in 2017-2018 is also variable. Conclusions: The Polish economic market is an attractive investment area in terms of cash allocation needs by venture capital funds. Increasing awareness of enterprise managers about the benefits of using these capitals to subsidize the activities of entrepreneurs allows them to discount VC and PE funds in innovative startups and in other processes, the implementation of which takes place in further phases of the company’s operations. The studies conducted so far cover the entire territory of Poland and are of an overview nature. The VC and PE funds, which are a new financial instrument, allow Polish enterprises to implement innovative projects.

Selection Determinants for Private Equity Investments

This study examines a global universe of public companies and identifies some properties of companies to become takeover targets. The analysis shows that low headcount-related ratios, low advanced performance ratios, and low leverage ratios are most likely to be associated with becoming a takeover candidate for private equity investors. Further, grouping private equity investors into different levels of risk aversion leads to an even more granular description of potential selection determinants of specific types of private equity investors. TOPICS:Wealth management, private equity Key Findings • The key properties of public companies to become takeover targets by PE investors are found to be low leverage, low personnel-related profitability, low cash ratio, low return on equity and return on assets, and the potential to improve the existing inefficiencies. • Long-term-oriented PE investors look for companies with a strong growth potential and a high asset base. • Risk-seeking PE investors focus on factors like return on equity and return on assets, but also look for a high trading turnover of the target company’s stock.

Do Investor Origins Affect Private Equity Investment Syndicates? A Case from India

The private equity industry has become a growing international phenomenon in recent years. As capital providers, PE firms are often seen to form collaborative relationships with one another during the investment process. These alliances can be pure syndicates—with similarly residing PE investors (domestic/foreign) or co-investments—when domestic and foreign PE investors jointly have stakes in the deal. In this study, the authors examine the composition of syndicates and their effect on investment patterns. They set their study in India, a country which is a rather late entrant into the PE market but has witnessed dramatic increases in PE investment in the last two decades. Using data from 1998 to 2014, pure syndicates are compared against those that have co-investment. The study also seeks to analyze if different syndicate types affect specific deal characteristics such as industry sector and investment size. Finally, the effects of investor origins and co-investment on investment size are explored. The results of the analysis indicate significant differences between industry sectors and deal characteristics, thus implying differing investor preferences. Regression analysis shows that co-investments were significantly associated with investment sizes. TOPICS:Private equity, performance measurement, emerging markets

Performance of Private Equity Backed IPOs: Evidence from an Emerging Market

This study covers 45 investee companies that were funded by PE firms during the period from June, 2000 to December, 2015. We have followed the Long-Nickels PME method, to estimate IRR and evaluate the performance of PE investment compared to market index. We found that, India is showing an increasing trend in the number of PE deals as well as the total amount invested through this route of investment, year over year. The post listing average returns have been mostly higher for the PE investors compared to the returns generated by shareholders. But surprisingly, these returns are on a decreasing trend. This can be attributed to increase in competition in the PE industry, leading to erosion of abnormal returns. The value added by the PE investors, to their investee companies, does not seem to be sustainable for long term because the post-listing shareholder returns have been consistently reducing and have been less than the PE investor’s returns.

Private Equity Investor Sentiment Around the World

I propose a new investor sentiment measurement for the private equity market based on over 12,000 private equity deals from 68 countries over 1992 to 2012. The data indicate that institutional environments and firm-specific characteristics are both strong determinants of the private equity investor sentiment. This investor sentiment will be relatively higher for smaller entrepreneurial firms in countries with better legal environments and with cultures characterized by higher levels of risk-taking. Such behaviors are robust when accounting for the prior investor sentiment. I also document the differences of this investor sentiment across different markets and investor types as well as the impacts from the recent financial crisis on it. In addition, I find that this investor sentiment can help identify and predict the investee firm-level profitability and earnings potential both in the short and long time horizons. It also can reflect the market timing abilities of PE investors when executing their divestment strategies successfully by using initial public offerings or acquisitions.

Financialisation in health care: An analysis of private equity fund investments in Turkey

The 2007–2008 global financial crisis revived interest in the impacts of financial markets and actors on our social and economic life. Nevertheless, research on health care financialisation remains scant. This article presents findings from research on one modality of financial investments in health care: global private equity funds’ investments in private hospitals. Adopting a political economy approach, it analyses the drivers and impacts of the upsurge of global private equity investments in the Turkish private hospital sector amid the global financial crisis. The analysis derives from review of research and archival literature, as well as six in-depth interviews held with owners/executive board directors/general managers of the largest private hospital chains in Turkey and the general partners of their PE investors. The interviewing process took place between January and November 2016. All interviews were conducted by the author in Istanbul. The findings point to a mutually reinforcing relationship between neoliberal policies and financialisation processes in health care. The article shows that neoliberal healthcare reforms, introduced under consecutive Justice and Development Party (JDP) governments in Turkey, have been important precursors of private equity investments in healthcare services. These private equity investments, in turn, intensified and broadened the process of marketisation in health care services. Four impacts are identified, through which private equity investments hasten the marketisation of health care services. These relate to the impacts of private equity investments on a) advancing the process of chain formation by large hospital groups, b) spreading financial imperatives into the operations of private hospitals c) fostering internationalisation of capital, and d) augmenting inequities in access to health care services and standards.

A Study on Determinants of Investment Decisions: A Venture Capitalist’s Perspective

In recent period Indian economy has witnessed multi fold growth as compared to developed economies in the world. Overall growth registered by the Indian economy is the result of MSME sector’s performance and specifically growth in IT and IT enabled services, bio technology, banking and financial services, healthcare and life sciences, manufacturing and retail businesses across the country. Technology driven businesses has attracted the attention of domestic and international investors due to increase in the use of IT enabled services by the majority of population in the country. Use of smartphones and internet penetration has provided ready platform for the sector to take out best of this opportunity. Ecommerce has provided the solution to the problems where the country was stacked since decades. Quality of higher education, entrepreneurial talent, risk taking ability of the younger generation and youth population in the nation has spur the growth of the sector. Information Technology industry has grown exponentially over last few years taking locational advantage of being in operation in cities like Mumbai, Bangalore, Pune, Ahmadabad and Delhi. The important factor which has contributed to the growth of the sector is availability of risk capital in the form of Private Equity and Venture Capital leveraging debt requirement of the venture in start-up phase. PE and VC has played the critical role in the establishment of technology driven businesses in developed countries. Considering the growth of start-up economy, domestic and international PE investors and Venture Capitalists are now looking towards India as world’s fastest growing economy. This research analyses the growth of PE and VC investments in the country for last five years with the help of economic data. Research also highlights determinants affecting investments decision of an investor on the basis of the data collected through interview method from investment team members of Venture Capital and Private Equity Firms. This will help entrepreneurs to understand the prerequisites of raising capital from Venture Capitalists and Private Equity investors.

Team Stability and Performance: Evidence from Private Equity

We examine the relation between team turnover and firm performance studying the private equity industry. Using a unique data set that tracks over time teams in 138 PE managers and their performance, we uncover a positive relation between turnover and fund performance. We propose and confirm in the data two channels that explain our findings: i) in the short-run, performance improves when bad performers are fired, ii) in the long-run, turnover helps teams to adapt and replenish their skills in response to shifting external demand. Our findings suggest that frictions coming from informational asymmetries may deter optimal turnover. These findings are surprising given the common belief among PE investors that team stability is key to long-term success.

Last Minute Deals: Rent Seeking in IPO Market

This paper explores rent-seeking behavior in a heavily regulated equity-financing market. Using manually-collected information about ownership changes from China’s IPO application filings for the Growth Enterprise Market (GEM), we find that over a third of firms receive late-stage private equity investment and subsequently halve rejection rates for IPO applications, compared to firms without PE investment. The PE investors help firms pass the regulatory barriers, especially for those with weaker quality, and are rewarded with 9.5 times return over a 14-month period for an average deal. We also examine alternative explanations for extraordinary PE returns, such as financing, selection/certification, and managerial involvement, and find rent-seeking is the most coherent explanation to our findings.

What Do Private Equity Firms Say They Do?

We survey 79 private equity investors with combined AUM of over $750B about their practices in firm valuation, capital structure, governance, and value creation. Investors rely primarily on IRR and multiples to evaluate investments. Their LPs focus more on absolute performance. Capital structure choice is based equally on optimal trade-off and market timing considerations. PE investors anticipate adding value to portfolio companies, with a greater focus on increasing growth than on reducing costs. We also explore how the actions that PE managers say they take group into specific firm strategies and how those strategies are related to firm founder characteristics.

Does Political Capital Create Value in the IPO Market? Evidence from China

This study examines the value of political capital in the Chinese IPO market. We find a positive relationship between a politically connected executive and the probability of IPO approval of entrepreneurial firms. We further identify that shareholders value those connections and give a market premium to connected firms after the firms go public. We provide evidence that other types of political capital gained through external sources, such as politically connected sponsors and PE investors, also bring benefits to the firms in their IPO approval, and these connections substitute for the effect of the executive’s political connections on IPO approval. We argue that in emerging markets where government intervention is still prevalent, political capital does create value and entrepreneurial firms usually build political capital to facilitate their access to the IPO market, although other types of political capital do not bring further benefits into the post-IPO market.

Does political capital create value in the IPO market? Evidence from China

This study examines the value of political capital in the Chinese IPO market. We find a positive relationship between a politically connected executive and the probability of IPO approval of entrepreneurial firms. We further identify that shareholders value those connections and give a market premium to connected firms after the firms go public. We provide evidence that other types of political capital gained through external sources, such as politically connected sponsors and PE investors, also bring benefits to the firms in their IPO approval, and these connections substitute for the effect of the executive's political connections on IPO approval. We argue that in emerging markets where government intervention is still prevalent, political capital does create value and entrepreneurial firms usually build political capital to facilitate their access to the IPO market, although other types of political capital do not bring further benefits into the post-IPO market.

The Real Exit: Selling Strategies Subsequent to Private Equity Backed IPOs

This study examines the exit strategy of private equity investors after they take their portfolio companies public. Recent empirical studies considering private equity exit channel and timing generally fail to expose the investor's strategy after the IPO. For this purpose I use a comprehensive set of PE backed IPOs from 1996 to 2005 in the United States and subsequently track governance characteristics until investors exit their controlling stakes. I find strong evidence that PE investors strategically choose whether to sell their position en bloc in a trade sale or gradually to dispersed shareholders on the secondary market. Severe governance differences between the two groups of exit strategies at IPO and evolving from IPO to exit suggest that PE investors anticipate and actively plan an eventual trade sale well in advance.