Private Equity Backing Research Articles

Leveraging national security: private equity and bankruptcy in the United States defense industry

Abstract Defense contractors play an essential role in US security operations. Among other responsibilities, contractors manufacture arms, manage logistics, analyze intelligence, and carry out cybersecurity operations. Historically, defense contractors were either publicly traded corporations or privately owned companies. The past two decades, however, have seen a major shift in the ownership structure of the US defense industry. Private equity firms—once niche actors in the US national security marketplace—have carried out over 1,500 deals involving defense contractors since 2000. This study employs a mixed-methods research design to assess the effects of private equity investment on the financial stability of the US defense industry. Using data on over 8,000 defense contractors, the inquiry finds that contractors with private equity backing experience bankruptcy at higher rates than contractors with no prior private equity investment. In addition, the study evaluates private equity activity in the military satellite services market—a field of growing importance in the strategically important domain of outer space. The inquiry’s findings have notable international security implications. Given the US’ role as a lynchpin in numerous alliances around the world, higher rates of bankruptcy among defense contractors have the potential to affect the security of the United States and its allies.

IPO suspension, financing uncertainty and corporate tax avoidance

The acquisition of external financing is an important factor affecting the development of enterprises and even the economic growth of a country. However, changes in the external environment often expose enterprises to uncertainties in obtaining external financing. Taking China’s initial public offering (IPO) suspension policy as a setting, this paper examines the impact of the associated external financing uncertainty on firms. The empirical results show that firms that are unable to secure planned financing due to the IPO suspension policy engage in greater tax avoidance activities than successful IPOs during the IPO suspension period; this phenomenon is mainly concentrated in firms that are not state-owned, have no venture capital or private equity backing, have lower debt servicing capacity and have lower tax avoidance risk. Moreover, the tax avoidance activities of enterprises positively influence their fixed asset investment and innovation investment during the IPO suspension period. Evidence based on IPO price performance indicates that investors respond positively to firms’ tax avoidance practices during IPO suspensions.

Picking Winners: Identifying Features of High-Performing Special Purpose Acquisition Companies (SPACs) with Machine Learning

Special Purpose Acquisition Companies (SPACs) are publicly listed “blank check” firms with a sole purpose: to merge with a private company and take it public. Selecting a target to take public via SPACs is a complex affair led by SPAC sponsors who seek to deliver investor value by effectively “picking winners” from the private sector. A key question for all sponsors is what they should be searching for. This paper aims to identify the characteristics of SPACs and their target companies that are relevant to market performance at sponsor lock-up windows. To achieve this goal, the study breaks market performance into a binary classification problem and uses a machine learning approach comprised of decision trees, logistic regression, and LASSO regression to identify features that exhibit a distinct relationship with market performance. The obtained results demonstrate that corporate or private equity backing in target firms greatly improves the odds of market outperformance one-year post-merger. This finding is novel in indicating that characteristics of target firms may also be deterministic of SPAC performance, in addition to SPACs, transaction, and the market features identified in the prior literature. It further suggests that a viable sponsor strategy could be constructed for generating outsized market returns at share lock-up windows by simply “following the money” and choosing target firms with prior involvement from corporate or private equity investors.

The Post-IPO Performance of Private Equity Backed Firms during the Great Recession

We examine the performance of PE-backed firms following their IPOs during the expansionary period of the early 2000s and their performance during the “great recession.” We employ a control group using multi-digit NAICS codes, which allows us to match firms much more closely than prior studies. The results during the market expansion of the early decade parallel those of the existing literature, showing PE-backed firms perform as well or better than non-PE-backed firms. However, while those studies conclude that IPOs are generally a positive addition to the market and its investors, we show their performance is significantly worse than their non-PE-backed peers during the great recession, suggesting the success of these firms is particularly dependent on the state of the economy.

Trends in Debt Valuations of Private Equity–Backed Dermatology Groups Before and During the COVID-19 Pandemic

Private equity (PE) firms have invested in and consolidated dermatology practices. Private equity firms typically operate by conducting leveraged buyouts, which occur when target companies are acquired with capital from PE firms and a combination of debt, which may include debt instruments held in business development corporations (BDCs). To investigate the valuations of dermatology PE-backed group (DPEG) debt instruments in BDCs' portfolios both before and during the COVID-19 pandemic. This cross-sectional study, conducted from August 1, 2016, to August 31, 2021, examined public financial statements filed by BDCs lending to DPEGs. The public filings of BDCs were searched from inception of the DPEG's debt instrument in a BDC's portfolio, and the amortized cost and fair value of each debt instrument were tabulated. The premium or discount at which each debt instrument was valued at a given time was calculated by dividing the difference between the fair value and the amortized cost by the amortized cost. Different testing methods were conducted for normal or nonnormal data to test differences in debt valuations across all DPEGs between 2 consecutive or nonconsecutive quarters. The search of the public filings found 10 BDCs containing data on 9 unique DPEGs. Overall, there were 15 trackable DPEG debt instruments because multiple BDCs can hold debt instruments for a given DPEG. Data were available from August 2016 through August 2021. During the study time frame, the amortized cost of the loans for an individual DPEG ranged from a low of $1.7 million to a high of $100 million. The valuation of debt instruments was stable for many DPEGs until some were discounted starting in May 2018, with a significant decrease from May 2019 to August 2019 (-1.4%; 95% CI, not applicable; P = .04), prior to the COVID-19 pandemic. Another significant decrease occurred during the pandemic from February to June 2020 (-9.0%; 95% CI, -13.6% to -4.4%; P = .002). US Dermatology Partners decreased to the lowest valuation (Golub BDC, -39.7%; TCG BDC Inc, -48.8%; TCG BDC II, -48.8%) of the DPEGs examined in November 2020 even after receiving a $10 million forgivable Small Business Administration Paycheck Protection Program loan in May 2020. After pharmaceutical companies announced effective COVID-19 vaccine candidates in November 2020, there was a modest and significant improvement in debt valuations (2.3%; 95% CI, 0.2%-0.4%; P = .03); however, they remained discounted. Only PhyNet Dermatology's debt instruments improved to a premium valuation by August 2021. Debt valuations of some DPEGs found in this cross-sectional study suggest a lower probability that their loans will be repaid in full. This could be a signal that some DPEGs are not performing well financially.

What is different about private equity‐backed acquirers?

AbstractThis paper investigates whether private equity (PE)‐backed acquirers have a “parenting advantage” in the mergers & acquisitions (M&A) market. We employ a sample of 788 PE‐backed firms and a carefully matched control group of 6,652 non‐PE‐backed peers, for which we observe the entire acquisition history over a 19‐year time span. Difference‐in‐differences estimates suggest that PE backing induces a sizeable but short‐lived boost to acquisition activity, while the type and complexity of acquisitions are similar to those of non‐PE‐backed peers. These results are consistent with the idea that PE backing enhances execution and speed in the M&A market. We find that portfolio firms benefit from this boost through improved valuations and margins. The extent to which this is true, however, depends on the institutional setting of the PE owner. Our results indicate that add‐on acquisitions are detrimental if PE owners are late buyers or suffer from limited attention problems.

Private Equity Backed Radiology Considerations for the Radiology Trainee

Radiology trainees are served well by understanding the financial and operational aspects of the burgeoning phenomenon of private equity (PE) backed radiology and its implications on radiologist roles and remuneration. Consolidation in radiology has two major patterns, namely coalitions and PE-backed corporations, with distinct ownership, remuneration, and clinical decision-making dynamics. PE is defined by stock ownership, reduced base compensation, and greater conflicts of interest with respect to clinical decision-making given private investors' arguably larger appetites for profit. Data on PE's impact on radiology are scarce, but literature in other specialties suggests a potential for negative effects. Early career radiologist data point to growing concerns over this phenomenon's growing presence in radiology. Radiology trainees are encouraged to become more financially literate with respect to PE, as this model has the potential to disrupt the practice of radiology and the competitiveness of future talent pools.

Trends in Underpricing of Private Equity Backed IPO at the Capital Market in Poland in the Years 2000–2018

<p>The global economy is distinguished by the dynamic development of financial markets and with it creating a new specific segments of the market. One of them is the market for venture capital and private equity funds, which is developing very dynamically for more than 50 years. This article aims to analyze the level of underestimation of the IPO on the Warsaw Stock Exchange companies supplied by venture capital and private equity funds. Analyzing the rates of return of 54 companies supplied with VC funds and 453 companies which do not have the support of venture capital funds in the 2000–1018 period, it should be stated that traditional companies reached the lower level of underestimation. For companies a broad market level underestimation of the IPO was 9.99% and for companies with VC/PE support – 9.12%.</p>

Loop gets private equity backing

Polymer recycling specialist Loop Industries has received a $35 million investment from Toronto-based private equity firm Northern Private Capital. As a result, it will own a 10.5% stake in Loop. The firm can also invest another $45 million in Loop over the next three years. Loop will use the funds to finance a joint venture with polyester maker Indorama that would break polyethylene terephthalate into its raw materials, dimethyl terephthalate and ethylene glycol. The two hope to start up a plant in 2020.

Does the private equity financing improve performance in family SMEs?

PurposeThe purpose of this paper is to explore the relation between family involvement in ownership and the performance of private equity (PE)-backed SMEs.Design/methodology/approachUsing a sample of 533 European PE-backed SMEs (i.e. 107 PE-backed family SMEs and 426 PE backed non-family SMEs), the author estimate the OLS model where a firms operating performance is a function of the presence or not of family shareholders, various other firm-specific characteristics, the experience of PE investor and a dummy for the financial crisis. To control the robustness of results, the author restrict the analysis to those firms that are incorporated in one of the 15 old member states of the European Union and the author include among the independent variables the one-year lagged values of the dependent variable.FindingsThe results show that PE-backed family SMEs outperform non-family PE-backed SMEs over the post-investment period.Originality/valueThis paper aims to extend literature about the link between PE backing and the involvement of family in ownership, considering European countries.

Three Rookie Mistakes Experienced CEOs Make in Managing a Private Equity–Backed Company

This article provides a top-line analysis of mistakes new CEOs, with deep Fortune 1000 company experience, make in running a private equity–backed company. The three mistakes include the following: #1—CEOs don’t understand the meaning of constant communication with the board; Mistake #2—the CEO does not have a strong bias towards action; and mistake #3—the CEO must drive results before infrastructure.

Deliberate premarket underpricing and aftermarket mispricing: New insights on IPO pricing

We decompose initial returns into deliberate premarket underpricing and aftermarket mispricing using stochastic frontier analysis. We model deliberate underpricing as a function of proxies of information asymmetry surrounding IPO value between market participants. Equity retained is an unlikely signalling mechanism to convey IPO value to outside investors through deliberate premarket underpricing. The presence of lock-in agreements, underwriter fees, number of uses of proceeds, and venture capital or private equity backing have positive impacts on deliberate premarket underpricing. Demand for firms' capital also explains deliberate premarket underpricing, whereas new issues market conditions have no impact. All these factors are found to explain a significant fraction of the variations in our deliberate underpricing estimates. Deliberate underpricing is the more dominant component that makes up initial return when compared to the fraction of aftermarket mispricing. We attribute aftermarket mispricing to trading volume in IPO shares on the first day, price adjustment between the filing price range and the offer price, and offer size. Equity retained explains the aftermarket mispricing rather than the deliberate premarket underpricing in contradiction to the signalling argument. More reputable underwriters are likely to provide price support in the early aftermarket, whereas we observe no impact on deliberate premarket underpricing.

Private Equity and Investment in Innovation: Evidence from Patents

The authors' analysis of the patenting activity of 472 companies that received private equity investments between 1986 and 2005 provides suggestive evidence of an increase in the effectiveness (though not necessarily the quantity) of their innovative activities. After such companies received private equity backing, the patents they applied for received more frequent citations than patents awarded before the involvement of PE firms. Companies acquired by private equity also show no sign of deterioration in patent “originality” and “generality,” which have been shown to be fairly reliable indicators of the fundamental nature of the research. And while there is no clear pattern of change in the level of patenting activity, corporate patent portfolios become more focused in the years after the private equity investments. The increases in our measure of patent “impact” are greatest in the areas that constitute the companies' historical core strengths. These findings are likely to prove increasingly important as private equity continues its incursions into growth areas of the economy.

Agents Unchained: The Determinants of Takeover Defenses in IPO Firms

Many companies continue to go public with takeover defenses even though institutional investors zealously oppose defenses in public companies. In this Article, I analyze the determinants of takeover defenses at IPO firms using an empirical analysis of 259 IPOs from 2008-12, interviews with numerous practitioners, and a survey of the corporate governance policies of significant investors. I find that the type of an issuer’s legal counsel’s M&A experience and the identity of pre-IPO shareholders explain much of the variation in takeover defenses at IPO firms. Companies advised by law firms with more target-side M&A experience adopt more defenses, while companies advised by law firms with more acquirer-side M&A experience adopt fewer defenses. Companies backed by venture capital funds are significantly more likely to adopt more takeover defenses. However, private equity backing has no effect on the pre-IPO adoption of staggered boards. Even though mutual funds and public pension funds are some of the most ardent opponents of takeover defenses in public companies, I find that issuers that they had invested in prior to the IPO almost always go public with robust takeover defenses in place. A comparison of issuers backed by Silicon Valley law firm Wilson Sonsini and New York law firm Simpson Thacher is particularly telling: Wilson Sonsini, a firm well known for its ties to the venture capital industry and its representation of targets, installed staggered boards in all of its IPO clients while Simpson Thacher, known for its private equity practice and acquirer representation, installed staggered boards in only 50% of its IPO clients. The lack of a consensus regarding the efficiency of defenses among the most experienced participants in the IPO market leads me to reject the idea that takeover defenses are generally optimal for pre-IPO shareholders.

When Do Managers Seek Private Equity Backing in Public-to-Private Transactions?*

Managers have the choice to take the firm private themselves in a management buyout or to seek private equity backing. We argue that managers seek private equity backing in case they are more constrained to finance the deal themselves. We confirm the hypothesis using a sample of UK public-to-private transactions over the period 1997–2003. A post going private performance analysis reveals that both management buyouts and private equity backed deals outperform their industry peers. However, private equity backed deals outperform their peers already before the deal takes place whereas management buyouts improve performance afterwards. This suggests a passive role for private equity firms in going private transactions.

Early Stage Financing of Clean Technology Industries: Does Private Equity Backing Matter?

Clean technology has the ability to transform the global economy by lessening climate change and providing for energy independence and strategic economic growth. This article examines the early stage financing of clean technology industries and the involvement of private equity. Financial comparisons between clean technology firms and other small-cap firms are made in terms of performance, price-toearnings ratios, capital expenditures, and research and development. The influence of private equity due diligence within the clean technology sector is also examined. A survey is used to gather information regarding early stage financing of clean technology firms and use of government grants. <b>TOPICS:</b>Private equity, ESG investing, other real assets, performance measurement

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.

Underpricing, wealth loss for pre-existing shareholders and the cost of going public: the role of private equity backing in Italian IPOs

This study analyses the role of private equity investors in solving asymmetric information problems and the relationship to underpricing, wealth loss for pre-existing shareholders and the cost of going public. According to certification theory, companies backed by private equity investors are expected to have lower underpricing at the moment of an initial public offering, as they have fewer adverse selection problems, and there is less ex-ante uncertainty. However, the relationship between private equity backing and the cost of going public to issuers is less clear. We use a dataset of 66 private equity-backed and 94 non-private equity-backed companies that went public on the Milan Stock Exchange between January 1998 and June 2008. Our findings provide evidence that out of the PE-backed firms, only those backed by private equity syndication show lower initial-day returns and indirect issuance opportunity cost, while there is no difference in the certification role between bank-related and non bank-related private equity investors. We also find that the benefits persist for IPOs backed by private equity syndication, although to a lesser extent, even after adjusting for direct costs (gross spreads) the opportunity cost of issuance.

Creative destruction? Evidence that buyouts shed jobs to raise returns

Building on the work of Cressy, Munari, and Malipiero (2007a) which showed that buyouts have higher operating profitability in the post-buyout period than matched companies, the paper examines contradictory popular claims that private equity (PE)-backed leveraged buyouts (LBOs) generate or destroy jobs as a result of the process of ‘rationalisation’. Using a sample of up to 57 UK whole-company buyouts and a matched sample of up to 83 controls over the period 1995–2000 we run loglinear employment regressions for one to five years after the buyout with buyout year variables as regressors. A PE dummy represents companies that have PE backing while other variables control for initial employment, gearing, investee size and profitability together with industry and macro effects. We find that there is no PE-‘choice’ effect: in the buyout year there are no significant differences between buyout companies and controls in terms of employment. But in the post-buyout regressions the PE dummy is highly significant and negative reaching a peak of 23% per annum after four years. So to achieve efficiency gains, buyouts bring about quick and substantial reductions in employment in target companies during the initial period of ‘rationalisation’. However, initial profitability, three-year average post-buyout profitability and three-year sales growth have positive elasticities with respect to future employment suggesting that buyouts, by generating higher operating profits from job cuts, may ultimately be associated with compensating job creation. This, however, is the subject for future research.

Does the Tenure of Private Equity Investment Improve the Performance of European Firms?

The paper investigates whether the presence and tenure of Private Equity (PE) investment in European companies improves their performance. Previous studies documented the unambiguous merit of a buyout during the 1980s and 1990s for listed firms in the US and UK markets. This study analyzes such influences in both listed and unlisted European firms during 2002-2007. Our analysis suggests that shortterm PE investments have, on average, a detrimental effect on firm performance. The performance of a firm that has PE backing is lower than that of a firm without PE backing in the first year of PE investment. Such an effect disappears if PE investments remain in the firm for an uninterrupted six-year term.