Private Equity Capital Research Articles

Covariance Crunch Revisited: One Year of Live Performance

A previous paper (“The Probability Frontier or, Covariance Crunch: A New Paradigm for Mean-Variance Optimization”) introduced the concept of a Directional Covariance matrix, which reduces market returns to pure directionality (+1 or -1), treating the magnitudes as noise. This is intended to produce better-diversified portfolios with more robust out-of-sample performance than traditional optimization. That paper showed the Directional Covariance matrix did indeed produce more diversified portfolios and better performance than a traditional optimizer in a 13-year back-test simulation for a seven-asset portfolio. We now revisit this test with one full year of new out-of-sample data, and compare its “live” performance against the hedge fund industry. While the traditional optimizer happened to do very well over the last year, the Directional Covariance technique produced a more diverse portfolio and outperformed the HFRI Fund-Weighted Composite index on an absolute basis and by nearly 2:1 on a risk-adjusted basis, with a beta of 0.53, an annual alpha of +2.6%, and R2 of 78%. Having a hedge fund-like risk profile and being fully liquid, this particular strategy is thus well-suited as a holding vehicle for committed (but uncalled) Private Equity capital, to avoid the dreaded “cash drag” effect. Don’t just shrink that covariance matrix; crush it!

Keynes's Application of Virtue Ethics in the General Theory in Chapter 9

Keynes carefully and methodically devoted chapter nine of the General Theory to a detailed discussion of Virtue Ethics which is related to Adam Smith’s discussion in The Theory of Moral Sentiments. Both Virtues and Vices were considered by Keynes. The four main virtues in the Greek version of virtue ethics, as enunciated by Plato(Socrates) and Aristotle, were Prudence, Temperance, Justice and Courage or Fortitude. Temperance and Courage can be combined, as done by Adam Smith in The Theory of Moral Sentiments into the virtue of self command. Adam Smith’s and Keynes’s explicit use of an Aristotelian, Virtue ethics approach contrasts with the economic profession’s explicit reliance on utilitarian ethics only. It is not possible to create a synthesis between the two different approaches to ethics. Keynes and Smith agree with Aristotle that the primary, major problem at the macro level for an economy is the existence of a major sub group of upper income class individuals that Smith appropriately identified as projectors, imprudent risk takers and prodigals. These individuals violate the primary virtue of prudence by activities that can cause negative effects that impact the entire society. Smith proposes that this behavior be neutralized or mitigated by imposing restrictions on their ability to obtain bank credit and loans. Smith also believed that at the macro level the number of sober people (frugal, parsimonious, circumspect, careful) will significantly outnumber the projectors, imprudent risk takers and prodigals, so that their impact on the macro economy would be limited. This, of course, is similar to Keynes’s point that “Speculators may do no harm as bubbles on a steady stream of enterprise.” However, this all changes if enterprise and speculation switch places, so that “…the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” This is precisely the problem that has arisen in the American and world economies since the late 1970’s. Thus, speculation can be regarded as a vice and enterprise can be regarded as virtue. The point can be made even more directly. A world dominated by George Romney type investors leads to growth and prosperity, while a world dominated by Mitt Romney types, Bain Capital private equity firms, hedge funds, financial speculators and stock market manipulators leads to economic downturn and stagnation.

The efficiency of the municipal waste management model in the Italian Municipalities

The role played by Public Administration in producing local public services has been modified. This is due to the increasing of complex necessities and to the progressive evolution of the society. So nowadays the Government is responsible for providing fundamental services in the life of any individual citizen. (Spallini S. 2014) Nevertheless in a time of recession there is a lack of financial resources. To combine these two conflicting factors the PA must be efficient in producing public services. The production of public services must be rationalized by adopting more efficient management models (Rhys A., Entwiste T. 2014). The aim of this paper is to analyse the efficiency of management in the municipal waste service in Italian cities and find a connection between the levels of efficiency and the management model adopted by the city. This study uses Data Envelopment Analysis to calculate a score for efficiency and to investigate the economies of scale in reference to management models used. We find a positive relation between dimension and efficiency, as we found more efficient management models with public capital or mixed public-private than those with only private equity capital.

Using a multiple method and mixed mode approach to examine women entrepreneur negotiating styles

Purpose – The purpose of this study is to explore an optimal research design for research on women entrepreneurs involved in negotiating term sheets for private equity capital. This research explores new ways for researchers to connect with such current “invisibles” through the use of a mixed method and mixed mode research design to expand sampling options and secure respondent participation. The authors discuss existing data sets that have been used as secondary sources for data on financing of companies and consider their inadequacy for research questions about process issues in negotiation. The authors present process-related findings regarding the efficacy of the research design. Design/methodology/approach – This paper reviews research on research methodology, incorporating a discussion of practices outside of the entrepreneurship discipline to discover effective practices for identifying respondents and data not currently captured in entrepreneurship data sources. The respondents were found through social media sites, angel networks, University networks and via identification through a proprietary financial intelligence database. Findings – An optimal research design to identify women business owners of growth-oriented firms who have negotiated private equity should consider mixed methods designs and mixed modes, including the use of digital networks that signal to potential respondents that research is being done. Research limitations/implications – Although the authors developed the multi-method, mixed mode (MMMM) research design, the sample size is still relatively small. This raises concerns about generalizability to the larger population and limits statistical analysis more suitable with larger data sets. However, the MMMM research design has enabled the authors to reach a difficult target sample. It has proven effective, although a longer time frame would have been helpful. Research limitations/implications – All of the large scale databases in entrepreneurship have limitations in providing optimal sampling frames for process-related research. The present research study was able to use conventional networks, social media sites and angel networks to connect with women business owners who have raised private equity, but who lack visibility in current data sets. The study shows that through the use of multiple methods, women entrepreneurs can be researched and some will share their experiences about process issues. The sample size was small and the quantitative data cannot be generalized. However, the methodology works and allows researchers to explore experiences that are not captured in existing data sets. Social implications – Entrepreneurship researchers can connect with “invisibles” by becoming more “social” and using social media sites that are used by women entrepreneurs. Researchers may not have immediate access to women entrepreneurs through these means, but rather they need to develop interpersonal contacts, build a social presence and trust to recruit respondents to complete online questionnaire studies about substantive topics such as negotiating term sheets for equity investments in their companies. Originality/value – This paper summarizes the “research on research methodologies” in entrepreneurship, reviews secondary data sources and discusses their limitations for specific types of research questions. A review of the value of MMMM research designs and best practices in online survey research outside of entrepreneurship provides insights into the incorporation of digital tools in other disciplines.

Norwegian Agro‐Food Attracting Private Equity Capital; Varieties of Capitalism – Varieties of Financialisation?

AbstractDue to the (relatively) small scale of the Norwegian food industry, Private Equity capital is deeply involved in the structural development of the sector through acquisitions and takeovers. The Norwegian social‐democratic model of agriculture, with its attempts to maintain farming all over the country, struggles with comparative disadvantages in productivity and Private Equity capital is investing in direct competition with farmer co‐operatives. An outline of the socioeconomic characteristics of the Norwegian model as well as those of Private Equity illuminates why they both fit well together. Thus, we argue in this article that it is the Norwegian model of agriculture, with its non‐market based elements, that today attracts finance capital and discuss whether this involvement of finance capital can be considered as a process of financialisation. Findings based on analysis of case‐studies of Private Equity buyout in the agro‐food industry suggest that the economic motives of Private Equity takeovers are based on a combination of typical industry capitalism with investments in productivity and efficiency, rather than merely financialisation. Findings are interpreted in a variety of capitalism framework combining social theory on financialisation with business school theories on Private Equity transactions.

“Punching above their weight”

Purpose – The purpose of this paper is to comprehensively review the sources of competitive strength of emerging market multinationals (EMMs). Since most lack firm-specific assets such as internalized knowledge or globally recognized brands, especially in their early international growth, and emanate from less-developed nations, the success of EMMs has to be explained by identifying factors in their home nations and international scope which make these firms internationally competitive. Design/methodology/approach – A comprehensive review of the extant literature and company cases identified several sources of competitive advantage for emerging market firms. Since conclusive evidence is still unavailable, many of these factors are proposed as hypotheses for future empirical research. Where needed, contrary viewpoints are also discussed and cited. Findings – This paper identifies several possible location-specific assets of emerging market companies including the mindset of top management of EMMs (such as long term orientation, global or cosmopolitan perspectives, a degree of humility that recognizes the need to catch-up by learning from foreign allies and customers, tolerance for ambiguity, and frugality) and home country cultural traits such as emphasis on relationships, family control, and private equity capital. Other sources of competitiveness may lie in the home country pool of technical talent and cheap labor, the extensive diasporas of persons of Chinese, Indian and Brazilian origin, and the role of common language as determinants for the geographical pattern of FDI from emerging nations. Originality/value – This paper serves the dual purpose of providing a comprehensive literature review of this topic for doctoral or Masters students, and specifying hypotheses (as well as opposing views) for further investigation.

New capitalist processes, interdependence and the Asia–US private equity relationship

Private equity has had a short but eventful history in East Asia, characterized first by US firm dominance and then by a nationalistic backlash. This article charts these earlier patterns, but argues that significant developments have taken place since the early 2000s, which have strengthened the position of private equity capital in the Asian political economy. As private equity deal-making has returned to Asia, new linkages have been formed between US private equity funds and local private equity players. Of particular importance have been US–Asian joint ventures, Asian nationals returning to domestic firms from US private equity houses and supportive local elites in the banking and pension fund sectors. The significance is two-fold. First, the spread of private equity has been founded on interdependent relationships between US actors and local actors, which have more successfully grounded the private equity industry in national political economies than its origins in the Asian crisis period. Second, despite the relative localization of Asian private equity, industry practices are still largely shaped by the US model of private equity and the merger and acquisition activity that it entails, rather than a distinct Asian private equity model. The findings of the article contribute to calls that have been made for research on the changing global economy that comprehensively integrates domestic and international levels of analysis.

Situating private equity capital in the land grab debate

This paper examines the private equity investment landscape in African land and agriculture markets by exploring two underlying questions: (1) Within the global land grab trend, how is power manifested for private equity investors? and (2) What are the development implications of private equity-backed investments? The essay begins with an overview of the recent rise of private equity in African land markets. It then analyzes the power relations embedded in this trend, particularly exploring the issues of information asymmetry and ‘creative destruction’ inherent in private equity finance, and their implications for governance and labour. Finally, the paper examines the power dynamics that characterize the relatively new relationship between private equity groups and development finance. Drawing on several illustrations of the World Bank Group's involvement in private equity-backed land investments, this paper demonstrates how the overlapping interests between development finance and private equity groups, in part, explain private equity's presence in emerging farmland markets.

Uncertainty Resolution Under Extreme Information Asymmetry: The Case Of Alberta's Private Equity Markets

This study develops and tests a model of how private equity market investors mitigate risk. We find evidence that changes in securities regulation increase the pool of private equity capital. We also identify a previously overlooked category of private equity investors that are neither angels nor venture capitalists and demonstrate that they play a significant role in this market.

PRIVATE EQUITY: SOURCES AND USES

Private equity capital is playing a large and growing role in the funding of small to medium‐sized, high‐growth businesses. Today's private equity investment typically takes the form of purchase of a minority interest in a post‐start‐up, high‐technology company followed by an IPO a few years later. A large number of such investors are scouring the markets for new investment possibilities and the competitive pressures are growing.Although private equity investors can and often do add significant value to a company, private equity is potentially expensive, in terms of both loss of ownership and loss of control over long‐term strategic decisions of the company. Owner‐managers who want to retain as much of both as possible are advised to install more formalized business procedures, expand the company's outside relationships, and become more familiar with the company's financial needs and options. These changes should reduce capital needs, reduce the costs of private equity funding, and increase negotiating leverage when dealing with large, sophisticated private capital investors.

Risk Capital for a Profitable Public Corporation: Public Dividend Capital or Equity?

The question of whether profitable public corporations should be converted to private, equity capital finance (i.e.‘privatized’, in current U.K. terminology) or not is arguably the dominant issue in the public sector of the U.K. economy. The present U.K. government has embarked upon a policy of privatization of state industries. This has attracted considerable criticism on the grounds that the government's actions are the product of ideological and short‐term fiscal considerations (principally the funding of public expenditure) rather than of carefully considered policy (Heald and Steel, 1981; Heald, 1983, p. 154). This topic is examined in this paper. The discussion is neither partisan nor ideological. Instead, it centres on the technical and economic merits of equity capital versus its public sector proxy, Public Dividend Capital (PDC). This latter form of capital financing has been neglected in recent years, as the major thrust of the public sector debate has addressed the need for equity capital in the nationalized industries. Therefore, the ensuing discussion is not only a critique of the case for introducing private equity capital in state industries, but it is also an assessment of the case for the retention of PDC as a major instrument of finance.

Risk Management in Commodity and Financial Markets

Having been asked to focus upon the problems outside primary agricultural production, and with the additional advantage of our early look at the Barry-Fraser paper, I have chosen to emphasize certain institutional factors in my approach. Recent events have highlighted the transition from institutionalized governmental risk bearing in the commodity sector back to the marketplace, as well as numerous problems and adaptions associated with the transition, including the emergence of a strong international oil cartel, proposals to counter this with other cartels, and a renewed interest in food reserves, as well as international commodity agreements. Concomitant with unsettled commodity prices have been massive disintermediation in the mortgage money market and a serious shrinkage in the availability of private equity capital. Mention of the collapse of real estate investment trusts and of the financial plight of New York City serves only to lengthen the list of horrors from which I must attempt to shrink in some orderly fashion. I shall retreat mainly to the confines of commodity price problems and the organized futures markets to see what has been done or could be done in that area, but I shall also venture a suggestion or two outside the commodity area.