Private Equity Firms Research Articles

Entrepreneurial Governance in Private Equity Investments: An Emerging Market Perspective

We investigate the different forms of entrepreneurial governance in private equity investments in emerging markets. Our research design is a multi-case, inductive study that uses field data to assess the full cycle of private equity investment in forty companies. We find that private equity firms can adopt four distinct entrepreneurial governance structures along two main dimensions: minority versus majority investments and active versus passive investor role. We analyze the main characteristics of these governance structures and discuss the main drivers that influence its adoption. Overall, our central contribution is enlarging the study of private equity governance in fragile institutional environments.

Private Equity and Financial Fragility during the Crisis

Do private equity firms contribute to financial fragility during economic crises? We find that during the 2008 financial crisis, PE-backed companies increased investments relative to their peers, while also experiencing greater equity and debt inflows. The effects are stronger among financially constrained companies and those whose private equity investors had more resources at the onset of the crisis. PE-backed companies consequentially experienced higher asset growth and increased market share during the crisis.

A framework for operational due diligence

Operational due diligence is an essential step in the purchase decision process when mergers and acquisition (M&A) practitioners assess whether a target company can realize future performance expectations. The aim of this paper is to strengthen the current research on operational due diligence and provide practitioners with a conceptual approach to perform successful operational due diligence. Empirical data was collected through explorative case studies with five private equity firms (acquirers) and six advisory firms (representing target companies) using semi-structured interviews and documentation. 140 past M&A cases were used as the empirical data material. Findings were validated through follow-up interviews and an explorative survey. The framework was validated through three workshops with practitioners. This paper presents six groups of operational drivers which have a direct influence on the operational part of an acquisition decision: (1) People and Organization, (2) Information Technology and Systems, (3) Costs and Capital, (4) Scalability, (5), Potentials and (6) Risk. Despite increasing numbers of M&As and the low success rate of these endeavors, very little research has focused on operational due diligence. This paper addresses this gap by presenting an operational due diligence framework useful for practitioners.

An Exploratory Study of the Impact of Top Leadership on Effectiveness of Privatization of Hospitals Through Mergers and Acquisitions in Kenya

This paper examines the privatization of hospitals through mergers and acquisitions (M&A) using Kenya as the country of focus. It shows that M&A activities are increasing in Africa and there is a history of privatization of state-owned enterprises (SOEs) / parastatals in Africa and Kenya in particular, which started in the 1990s. With the changing dynamics, increasing pressure to achieve universal health and looking at the history of mergers and acquisitions there is no doubt that this is going to become an important phenomenon in Kenya in the near future.Privatization of hospitals, including public and not-for-profit (NFP), has been popular since 1980s in North America (U.S., Canada) and Europe (Germany, England). Privatization and M&A activities of hospitals in other countries such as India, China, Saudi Arabia, Africa and Kenya have also increased. The reasons for these trends are industrialization of developing countries, changing lifestyles, aging populations, longer life expectancy, technological advancement, growth of the middle class, increase of non-communicable diseases (NCDs) and inefficiency of public health systems. With the changing dynamics, it would appear there is a need for African countries to expand their private sectors, and privatization of healthcare is an attractive area for private equity firms and private hospital chains. Due to growth of the economy and the middle class, higher demand for healthcare services and particularly expansion of NHIF (National Hospital Insurance Fund) coverage, privatization of hospitals makes economic sense in Kenya.Knowledge of M&A among top leadership is crucial in determining its success or failure. Therefore, the literature review focused on property right, transaction cost, and institutional theory. Relevant M&A theories such as process, synergy, efficiency and disturbance theory were also reviewed.The research philosophy, methodology and design of this study was based on exploratory, post-positivism, deduction and utilized mixed methods (qualitative and quantitative) with focus on verifying the hypothesis. The population of this research included Level 4, 5 and 6 hospitals in Kenya, totaling 268 hospitals with at least 50 beds; the sample size was 158 hospitals. Proportionate stratified random sampling methodology was used to determine the sample size of each hospital level (Level 4, 137 hospitals; Level 5, 14 hospitals; and Level 6, 7 hospitals).The hypothesis that there is no relationship between top leadership (X) and the effectiveness of privatization of hospitals (Y) through M&A was tested and there was a strong and positive relationship between the dependent and independent variables (r=0.821), and the regression model was found to be reliable. The null hypothesis was rejected because of the results of the T-test (β1=0.925, t=9.757, p<0.005).It is recommended that similar studies be conducted in East and South Africa to enable researchers to perform comparative analyses in order to improve the body of knowledge.

Annington versus Deutsche Annington: Private Equity and Housing in the Anglo-Saxon and Rhenish Contexts

ABSTRACTUnder the Rhenish model of capitalism the interests of other stakeholders than shareholders are essential to the interests of the firm. However, Rhenish institutions in Germany have been changing. In the housing sector, many organizations that promoted the provision of affordable housing are currently managed by private equity firms promoting shareholders’ interests. This paper presents a dual case study on two housing providers: Annington in the UK, and Deutsche Annington in Germany which were owned by the same private equity investor, Terra Firma. The paper – based on this analysis of a single approach to the management of two comparable firms in the Rhenish and Anglo-Saxon contexts – considers the question of whether the Rhenish model is being swept away by the shareholders revolution. The paper concludes that this is not the case and that certain differences between these cases reflect the continuing differences between the Anglo-Saxon and Rhenish models of capitalism.

How Do Oil and Gas Investors Pick Entrepreneurs? Vice Versa?

Private equity and venture capital firms are just as important to the evolution of the oil and gas industry as the leading operators and service companies. This became evident during the oil price crash when public equity opportunities disappeared and lenders shied away from the industry amid scores of bankruptcies. Illustrating the point earlier this year was Wil VanLoh, founder and CEO of Quantum Energy Partners, who boasted during the NAPE Global Business Conference that his firm would “look really similar to a superindependent” if it were to aggregate all the companies in which it’s currently investing, which altogether tally 2.3 million net acres, 350,000 BOE/D, and 32 rigs working across the US and Canada. With the backing of private investment, entrepreneurs who previously worked for companies such as Shell, Anadarko, Halliburton, Baker Hughes, and even smaller, lesser known entities have applied their unique skills and ideas to find, develop, and produce the latest generation of prolific oil and gas fields quicker and with less money than ever before. But finding those innovators who are actually capable of turning their dreams into reality is difficult. And when you’re the firm tasked with bearing the financial risk that comes with backing fledgling companies that hope to break into an already volatile industry, you tend be choosy. Enter Charlie Leykum, founder of CSL Capital Management, a 10-year-old private equity firm that builds and acquires controlling interests in oil and gas service and equipment companies. It’s currently launching its $1.5-billion Fund III as well as a special-purpose acquisition company, which raises capital from public investors, enabling them to participate in private equity purchases. “So much of what we do is finding not just an individual or a group of individuals who are technically or commercially really savvy,” but finding a “harmonized, well-working team,” Leykum said during the SPE Gulf Coast Section’s recent Innovation Entrepreneurship Symposium. CSL only considers business plans where a team is either in place or assembling with “a subject matter expert who’s the key decision maker” as well as technical and operations personnel. Together, they must have a firm grasp of the challenges and risks involved in building a business. When looking at possible investments, CSL wants technical leadership in a market. When CSL invested in a fracturing company in the early 2000s that ended up successful, Leykum said, the firm partnered with a major service company’s “lead fracturing executive for the business line” whose skills and expertise could solve—and had solved—unique challenges in different basins.

The Private Equity Return Gap

Private equity firms have discretion over the timing of their funds' capital calls and distributions, making the popular internal rate of return (IRR) an incomplete measure of private equity fund performance. Do investors avoid the textbook pitfalls of the IRR when cash flow timing is partly endogenous? In a comprehensive sample of 6,945 funds, the authors find that more than half of the funds' IRR is attributable to timing, with substantial variation. The timing component persists across a private equity firm's funds and facilitates fundraising.

Risk and performance of bonds sponsored by private equity firms

Abstract The bond market is an important source of financing for Private Equity (PE) sponsored transactions. Using the methodology suggested by Bessembinder et al. (2009), we find that PE-sponsored bonds underperform comparable benchmarks. This is especially true for bonds with credit ratings below investment grade and those issued in hot bond markets. Furthermore, bonds sponsored by more experienced PE groups (PEGs) underperform bonds associated with less experienced PE groups, while bonds backed by investment bank-affiliated PEGs underperform bonds sponsored by other PEGs. These findings highlight the risk and return relationship in the high-yield bond market related to leveraged buyouts (LBOs) and PEGs.

Protection of Private Equity Investors under the Dodd-Frank Act

In securities law, investor protection means that an issuer of securities, here partnership interests for private equity, must register with the Securities and Exchange Commission (“SEC”) and be subject to disclosure, reporting, record-keeping compliance and examination programs. This article argues that the Dodd-Frank Act has fulfilled part of its objective to protect private equity investors by forcing private equity managers to disclose information on their operations. Disclosure has provided greater transparency about how the business of private equity is conducted. The increased SEC scrutiny started in 2014 has uncovered unfair practices and violations of fiduciary duties that sophisticated investors could not detect on their own. Notwithstanding this improved transparency, the Dodd-Frank Act still falls short of imposing the main tool securities laws uses to protect investors: that is, full and fair disclosure. In other words, Dodd-Frank does not provide all the required protections that are important for investors to assess the quality of their investments and make informed decisions. This article offers to expand transparency by additional public disclosure of investment returns, fees, and managers’ income. For other policy issues unrelated to the protection of investors, that is, jobs or tax, Title IV of the Dodd-Frank Act does not offer the appropriate setting. Applying or enacting legislation concerning tax, labor or bankruptcy laws can better curve the controversial practices of private equity firms.

Private Equity Impact on Corporate Innovation

This paper focuses on the influence of Private Equity (PE) firms on corporate innovation with the purpose of identifying opportunities such as new or enhanced strategies that PE firms would use to in order to increase the success rate of their acquisitions. The paper starts with a comprehensive literature review and creates a strong theoretical foundation about PE Leveraged Buyout (LBO) companies and their impact on corporate innovation. The methods used in this paper are the case study research, which is introduced to create theory [1] and the review-centric research approach of reviewing existing theory and research as well as for creating a new model of variables and relationships [2] that can be used to validate new hypotheses. The paper introduces a new model that is based on data collection from the review of existing theory and research. The model is a collection of variables that are categorized and linked together to depict new relationships that show the PE LBOs’ influence on corporate innovation. The research also identifies inconsistency in the existing research literature as an opportunity for future research. The research is limited by the duration of a semester which is the timeframe allotted to complete the research work. Develop understanding of the reasons some LBOs fail and strategies that will help PE firms increase the success rate of their investments and create a win-win scenario for investors, employees, and the entire value chain. This paper new concepts and ideas are completely derived from the theoretical foundation and the professional experience of the author.

Business Roundup

BUSINESS Business Roundup ShareShare onFacebookTwitterWechatLinked InRedditEmail C&EN, 2018, 96 (15), p 19April 9, 2018Cite this:C&EN 96, 15, 19AbstractKureha will spend $94 million at its site in Iwaki, Japan, to increase polyphenylene sulfide capacity by 5,000 metric tons per year. The heat-resistant polymer is used in industrial applications such as automotive electronics. The site is located in an area that was affected by the 2011 tsunami. BioConsortia, a developer of microbes for plant trait enhancement and yield improvement, has raised $10 million from investors, including Otter Capital and Khosla Ventures. CEO Marcus Meadows-Smith says the funding will allow the firm to add more genomic and machine-learning tools. Prince International has been sold by Palladium Equity Partners to American Securities, both private equity firms, for an undisclosed sum. Prince makes manganese derivatives and other inorganic materials. Wild Type, a San Francisco-based cultured meat start-up, has raised $3.5 million in seed funding from Spark Capital, Root Ventures, and other backers. The firm says it is developing a process for makingView: PDF | Full Text HTML

The interplay between home and host country institutions in an emerging market context: Private equity in Latin America

This study examines how the interplay between home and host country regulatory institutions affects the investment strategy of private equity (PE) firms in an emerging market context. To answer this question, we consider three different mechanisms: (1) the institutional hazard avoidance effect, (2) the institutional escapism effect, and (3) the dysfunctional institutions effect. Contrary to conventional wisdom, we argue that regulatory institutional differences between home and host countries can sometimes have a positive rather than a negative effect on investment likelihood. Our findings show that when a host emerging market has a strong regulatory institutional system relative to other emerging markets, it is more likely that this country will attract PE investments from firms based in home countries with very strong and very weak institutional systems. The empirical analyses, based on a polynomial specification and a dataset covering more than 300 PE firms that made close to 1500 investment transactions in Latin America during 1996–2011, are consistent with our main theoretical arguments.

Private Equity Firms Owned Chemical Distributors

This article is a follow up on the article Tay and Chelliah [2013] where at that time five of the world's top chemical distributors are owned by private equity firms. This paper will revise the information on the global chemical market sales and the market size available for chemical distributors. This discussions and anayses will cover the private equity owned chemical distributors whom have undergone primary and secondary buyouts, and also initial public offerings, namely Brenntag, IMCD and Univar. The value creation drivers, operational performances improvements, leverage and multiple expansion, were used to evaluate the performances of the companies after they have undergone IPOs. For Brenntag, the three value creation drivers were also used to evaluate their performances after their primary and secondary buoyouts.

Investing in Microfinance. Why and How ? The case of Tunisia

After the Tunisian revolution people were hit by the bitter reality of the Tunisian miracle of Ben Ali's regime with an unemployment rate of 20 % and a poverty rate reaching the 25%. With no access to loans, low income people find themselves in a vicious circle of poverty that will lend them either to beg or criminality. Many of the poor people have a heavy life baggage and their personal life could have been ripped from the pages of Les Miserables . Such reality pushed the government toward draconian changes which lead to more liberalization of the microfinance sector to alleviate poverty and enhance social inclusion. Among the new allowed player is a private equity firm InvestCo. The decision has caught the industry by surprise as microfinance sector in Tunisia was always under the scope of nonprofit associations, and far from private equity firms reach. Hence the following inquiries : why a private equity firm would invest in this sector ? Why now ? Is the sector profitable ? Is it competitive ? What will be its strategy ? To answer these questions we followed the whole process that a private equity fund undertakes, i.e. studying the sector competitiveness, analyzing the investment opportunity and finally defining the strategy. We present in this business case the major steps of the approach.

Thomas Aquinas (A.K.A. the Medieval Church, Canonists, Scholastics, and Schoolmen) and J M Keynes on the Necessity of Excluding Smithhs Projectors, Imprudent Risk Takers, and Prodigals From Receiving Any Bank Loans

J. M. Keynes had already recognized in his 1930 A Treatise on Money that the major cause of deflation and inflation problems at the macro level was the ability of Smith’s Projectors, Imprudent risk takers, and Prodigals, whom Keynes categorized as Wall Street connected speculators and rentiers (modern day hedge funds, private equity firms, and investment banks) in his General Theory in 1936, were the fundamental problem in a capitalist society because they diverted bank loans from investment in durable capital formation into the financial manipulation of paper claims in various stock and money markets. The General Theory makes it even clearer because it reiterates what he had said in both the A Treatise on Money and in the 1932 Symposium on Usury in the Economic Journal in response to Keynes’s decision to publish a 1931 article by Henry Somerville. Keynes heavily supported Somerville’s major point about the dangers of using bank loans to finance speculative debt leverage practices versus loans to finance the purchase of durable capital equipment. This is the same point made by Smith with respect to loans made to his three categories of upper-income class citizens that Smith labeled as Projectors, Imprudent risk takers, and Prodigals. Both Smith and Keynes were influenced by Aristotle. Keynes admitted that he felt that the arguments of the “ancients”, “Medieval Church”, and “Schoolmen” were also influential in his general conclusions, although he differed from them in some specifics. Smith also used the term “Scholastics” and “Schoolmen” several times in his The Theory of Moral Sentiments. By far the most prominent member of the Medieval Church, Canonists, Scholastics, and Schoolmen was Thomas Aquinas. Somerville, in his June 1936 article in The Commonweal, titled, Usury as a New Issue, argued for a connection between the views of Keynes and Aquinas specifically. He had originally pointed out in the December 1931 issue of the Economic Journal Keynes’s connection with the “canonists” in his A Treatise on Money. In March 1932, the Savings and Usury Symposium was held in the Economic Journal. Keynes essentially states what he latter restated in the General Theory in chapter 23 in 1936. Keynes’s view on the dangers to the macroeconomy of making loans to speculators and rentiers did not change from 1930 until the end of his life. Aquinas’s work on decision making under conditions of ignorance, risk, uncertainty, imperfect information, asymmetric information and imprecise/indeterminate, interval-valued probabilities puts him heads and shoulders above any contemporary thinker until Adam Smith’s Wealth of Nations was published in 1776. Aquinas’s contribution has not been correctly appreciated because of his realization that precise, mathematical, point estimates of both prices and probabilities are generally impossible. This thus greatly constrains the use of the mathematical laws of the probability calculus upon which both neoclassical and modern economics is built on.

Layoffs and Private Equity

Private equity firms are sometimes obliged to trim payrolls. When they do, there are ways to turn these events into positive local economic development opportunities. Entrepreneurs can be discovered and nurtured to create new businesses. Win win for communities and investors.

Private Equity Buyouts: Anti- or Pro-Competitive?

Private equity firms have become common owners of established firms in concentrated markets. Antitrust authorities therefore intervene in mergers and acquisitions involving PE firms. In this article, we discuss the antitrust implications of an active PE market and whether there are any special characteristics of PE ownership that are important for antitrust regulation and enforcement. To gain some perspective, we approach the question from three pillars of industrial organization: (i) identifying and blocking mergers that create substantial market power; (ii) detecting and preventing predatory behavior; and (iii) detecting and preventing collusive behavior.

Eclipse of the Public Corporation or Eclipse of the Public Markets?

The authors look back at Michael Jensen's 1989 article “The Eclipse of the Public Corporation.” They find some of his predictions have been borne out but other important ones, not. Jensen concluded that the publicly held corporation was in decline and had outlived its usefulness in many sectors. He argued that agency costs made public corporations an inefficient form of organization and that new private organizational forms promoted by private equity firms would likely replace the public firm.The number of public firms in the U.S. has declined significantly but there are still many hugely profitable and successful public companies. U.S. public markets are still well‐suited for firms with mostly tangible assets. So, what we are really witnessing is an eclipse not of public corporations, but of the public markets as the place where young firms with mostly intangible capital seek their funding.This is especially true when the usefulness of the intangible assets has yet to be proven. Sometimes the market is extremely optimistic about some intangible assets, but otherwise firms with unproven intangible assets may be better off funding themselves privately. This evolution has a downside: investors limited to public markets are cut off from investing in high intangible‐asset firms. Additionally, as fewer firms remain publicly listed, fewer firms will be transparent to society.

Private-Equity-Firm-Owned Chemical Distributors: Exit through SBOs or IPOs?

This article is a follow-up to 2013 research by Tay and Chelliah. At that time, five of the world’s top chemical distributors were owned by private equity firms. This article updates the information on global chemical market sales and the market size for chemical distributors. This discussion and analyses will cover the PE-owned chemical distributors that have undergone primary and secondary buyouts and initial public offerings—namely, Brenntag, IMCD, and Univar. The value-creation drivers—operational performance improvements, and leverage and multiple expansion—were used to evaluate the performances of the companies after they underwent their IPOs. For Brenntag, the three value-creation drivers were also used to evaluate its performance after its primary and secondary buyouts.

Private Equity Funds and Firm Products

We examine changes to the products of public target firms after LBO using a novel dataset of firm products. We find that private equity funds cut target firms’ new products after LBO, especially when there is less room to improve the target firm’s performance through financial engineering. Additional tests suggest that PE funds cut target firms’ investment on product innovation mainly to boost their short-term performance at the cost of long-term performance. We find mixed evidence regarding the hypothesis that PE funds cut target firms’ new products to undo their overinvestment on product innovation before LBO.