Private Equity Firms Research Articles

Taking Private Equity Public: The Blackstone Group

On the eve of the Blackstone Group's much anticipated initial public offering (IPO), a Wall Street portfolio manager contemplates his commitment to purchase 20,000 units at $31.00 each. As one of the largest IPOs in recent history and the first major PE fund to go public in the United States, the offering had stirred up significant media and congressional interest, some of which was potentially damaging for the PE industry. Even taking the uncertainty of the tax law into consideration, the manager thought the market would respond positively to Blackstone's newly traded units. But there were still risks to consider. Excerpt UVA-C-2327 Rev. Sept. 14, 2017 Taking Private Equity Public: The Blackstone Group In the summer of 2007, Jillian Smith, portfolio manager of Cougar Investments, marveled at the tremendous success that the private equity (PE) industry had been enjoying. The importance of debt financing in executing PE transactions, the prevalence of loose lending standards, and the low interest rates in 2007 resulted in a staggering $ 686 billion invested globally in PE. The public equity markets were also booming, with the Standard & Poor's 500 Index (S&P 500) up 22% for the previous 12 months. The mortgage market had begun to falter, however, as borrowers defaulted at higher rates. It was unclear whether this instability would spread to a wider set of lending activities and ultimately impact the equity markets. Nonetheless, Smith, like many Wall Street portfolio managers, was eager to own a piece of the PE industry's most prestigious and successful funds. On June 21, 2007, the eve of The Blackstone Group's much anticipated IPO, Smith contemplated her commitment to purchase 20,000 units at $ 31 each. As one of the largest IPOs in recent history and the first major PE firm to go public in the United States, the offering had stirred up significant media and congressional interest, some of which was potentially damaging for the PE industry. Smith had just read about two proposed bills that threatened to change the taxation of PE funds. One plan changed the tax treatment of publicly traded PE firms, and the other changed the taxation of carried interest, the percentage of a PE fund's profits paid to its management team. Even taking the uncertainty of the tax law into consideration, Smith believed the market would respond very positively to Blackstone's newly traded units. Her optimism stemmed from the 18% return earned by investors who bought Fortress Investment Group during its IPO a few months earlier. The PE Industry . . .

Harman International and Kkr (a)

When courted by KKR, Harman International was experiencing robust times. After several months of due diligence performed by KKR and its financial and legal partners, KKR announced that Harman International had agreed to be acquired in a private equity transaction valued at $8 billion. But by the time the documents pertaining to the Harman International/KKR transaction were on the table, the financial markets that had ridden on the enormous momentum from prior years into the first half of 2007, almost overnight experienced a cooling-off period of unprecedented magnitude. Unfortunately, Harman International's fourth quarter results released in August 2007 were disappointing, prompting some critical questions: What was the real intrinsic value of Harman International, and which financial metrics were most meaningful in assessing that value? Should KKR follow through on the proposed transaction or pay a required $225 million termination fee? Was going private still in the best interest of Harman International, or should the CEO abandon the transaction and have his company pay the termination fee? Followed by the B case, C-2311. Excerpt UVA-C-2305 Rev. Mar. 19, 2012 Harman International and KKR (A) On the morning of September 21, 2007, Sidney Harman and Henry Kravis sat at a conference table overlooking Central Park in the New York office of Kohlberg Kravis Roberts & Co. L.P. (KKR). The purpose of the meeting was to determine the fate of an $ 8 billion private equity transaction between a group led by KKR and the renowned audio-equipment maker Harman International Industries, Inc. (Harman International). It had been 10 months since Kravis first approached Harman about acquiring Harman International. Kravis, cofounder of one of the world's leading private equity firms, had made the first direct pitch to Harman in his Washington, DC, office. Kravis strongly believed the time was right for Harman International to go private. Harman was initially reluctant to sell because Harman International was experiencing robust times, as exemplified by its recent financial performance, and he enjoyed being at the helm of the company as executive chairman. “This is how I define myself. This is my life,” he said. Yet there were compelling reasons for him to consider Kravis's offer. Although vigorous at heart, Harman was 88 years old. He also recalled the difficult time replacing former CEO Bernie Girod. Girod, after more than 20 years with the company, had recently retired, but his successor had lasted only a few months. Harman also knew he would receive a financial windfall from the sale: He owned approximately 5% of the company's common stock, and the value offered by KKR and its partners would provide more than $ 400 million in financial security for him, his wife (U.S. Congresswoman Jane Harman of California), their extended families, and their many philanthropic interests. Harman International . . .

Naandan and Jain: Leave this World Better than You Found it

India-based firm, Jain Irrigation Systems (Jain Irrigation), and its acquisition of NaanDan Irrigation Systems (NaanDan) offers an opportunity to explore supply chain sourcing and coordination as well as shupply chain management and global innovation. At the time of the case, Jain Irrigation's supply chain focus was mainly in India and the United States. While Jain Irrigation had deep knowledge of and production capabilities in the agriculture industry, Jain Irrigation believed that it would benefit from an Israel-based drip-irrigation company's technology and supply chain, so it arranged a meeting to talk about a joint venture. From its humble beginnings on a kibbutz in 1930, NaanDan had become a major manufacturer of micro irrigation with a global presence. NaanDan had manufacturing facilities in Israel, the United States, Chile, Brazil, Spain, and Australia. With its vast supply chain, NaanDan could get its product anywhere in the world. What the company leaders wanted was to create a competitive advantage through an investment in technology. In early 2007, NaanDan announced on its website that it was looking for a partner. The question was, should it sell the company to a large global firm such as John Deere, which had formed its own micro- and drip-irrigation business in 2006, seek private equity firms that had industry-specific knowledge and global networks, or pursue opportunities with competitors? Excerpt UVA-OM-1547 Rev. Apr. 3, 2017 NaanDan and Jain: Leave This World Better Than You Found It Farmers in the seventh-largest county in the world did a lot of talking about the weather—especially about rain or lack of it. The India-based firm Jain Irrigation Systems (Jain Irrigation), whose founder, Bhavarlal H. Jain, established the company with a mission to “leave this world better than you found it,” had been searching for an opportunity to help advance micro irrigation worldwide and gain competencies in that area. Thus far, Jain Irrigation's supply chain focus was mainly in India and the United States. While Jain Irrigation had deep knowledge of and production capabilities in the agriculture industry, the company believed that it would benefit from an Israeli-based drip-irrigation company's technology and supply chain, and NaanDan of Israel seemed like a good possibility, so it arranged a meeting to talk about a joint venture. From its humble beginnings on a kibbutz in 1930, NaanDan Irrigation Systems (NaanDan) had become a major manufacturer of micro irrigation with a global presence. NaanDan had manufacturing facilities in Israel, the United States, Chile, Brazil, Spain, and Australia. With its vast supply chain, NaanDan could get its product anywhere in the world. What the company leaders wanted was to create a competitive advantage through an investment in technology. In early 2007, NaanDan announced on its website that it was looking for a partner. The question was about the best way to enable the company to make this investment. Should it sell the company to a large global firm, such as John Deere, that had formed its own micro- and drip-irrigation business in 2006; seek private equity firms that had industry-specific knowledge and global networks (as was done by its biggest local competitor, Netafim); or pursue opportunities with other similar firms in different geographical locations? The Water Irrigation Industry . . .

Foreignness as both a global asset and a local liability: How host country idiosyncrasies and business activities matter

While international business research traditionally portrays foreignness as a liability for dealing with local market idiosyncrasies, this paper argues that it can regularly shift back and forth between being an asset and a liability. Key to this argument is the fact that the performance of a firm in a particular host country can be importantly shaped not only by activities aimed at accessing key external resources in local markets, but also by those targeting resources in global markets. When the focus is tapping into local resource markets, foreignness can be a liability that grows in size with the idiosyncrasies of those markets. But when the same firm in the same host country turns to global markets for external resources, foreignness can become an asset that also increases in value with the significance of local idiosyncrasies. I test this argument by looking at the performance effect of being foreign for private equity (PE) firms when investing in, and when subsequently exiting from, portfolio companies in emerging economies. The analysis capitalizes on a novel dataset tracking 546 PE deals, managed by 45 foreign and local PE firms, and across 49 emerging economies at varying levels of institutional development.

The Capital Structure of PE‐Funded Companies (and How New Debt Instruments and Investors Are Expanding Their Debt Capacity)

The capital structures and financial policies of companies controlled by private equity firms are notably different from those of public companies. The concentration of ownership and intense monitoring of leveraged buyouts by their largest investors (that is, the partners of the PE firms who sit on their boards), along with the contractual requirement of PE funds to return their capital within seven to ten years, have resulted in capital structures that are far more leveraged than those of their publicly traded counterparts, but also considerably more provisional and “opportunistic.” Whereas the average U.S. public company has long operated with roughly 30% debt and 70% equity, today's typical private‐equity sponsored company is initially capitalized with an “upside‐down” structure of 70% debt and just 30% equity, and then often charged with working down its debt as quickly as possible.Although banks supplied most of the debt for the first wave of LBOs in the 1980s, the remarkable growth of the private equity industry in the past 25 years has been supported by the parallel development of a new leveraged acquisition finance market. This financing innovation has led to a general movement away from a bankcentered funding base to one comprising a relatively new set of institutional investors, including business development corporations and hedge funds. Such investors have shown a strong appetite for new debt instruments and risks that banks have been unwilling or, thanks to increased capital requirements and other regulatory burdens, prohibited from taking on. Notable among these new instruments are second‐lien loans and uni‐tranche debt—instruments that, by shifting the allocation of claims on the debtor's cash flow and assets in ways consistent with the preferences of these new investors, have had the effect of increasing the debt capacity of their portfolio companies. And such increases in debt capacity have in turn enabled private equity funds—now sitting on near‐record amounts of capital from their limited partners—to bid higher prices and compete more effectively in today's intensely competitive M&A market, in which high target acquisition purchase prices are being fueled by a strong stock market and increased competition from corporate acquirers.

Farmland investment and financialization in Saskatchewan, 2003–2014: An empirical analysis of farmland transactions

Since the province of Saskatchewan, Canada liberalized its farmland ownership rules in 2003, private equity firms, pension funds, and wealthy individuals have acquired more than 800,000 acres of farmland. These investors have acquired land with the aim of securing income flows by renting land to independent farm operators and realizing capital gains. The influx of outside investment has raised questions about how these trends could change patterns of farmland ownership, influence farmland values, and affect rural communities. This article analyzes a database of all farmland transactions in Saskatchewan from the period 2003–2014 in order to examine investor behaviour in relation to the farmland market. We present data on the amount of farmland changing hands (the turnover rate), the scale of investor farmland purchases, and prices paid by investors and non-investors, on an annual basis. Our analysis reveals that investors acquired their farmland portfolios over a relatively short period of time; that investor activity seems to have peaked in 2012; and that, on average, investors paid more for farmland than other buyers in a number of ‘high-activity’ regions of the province. Furthermore, while some investors continually accumulated land throughout the study period, others bought and sold large portfolios over a few years. These trends provide further evidence of the ‘financialization’ of farmland in Saskatchewan.

Managerial innovation incentives, management buyouts, and shareholders' intolerance of failure

This study demonstrates that, apart from managerial agency problem, shareholders' intolerance of failure also deteriorates managerial innovation incentives in public firms. Furthermore, management buyouts improve the innovation intensity, even if managers gain no excess value from the buyouts in collaboration with private equity firms. The study provides insights into the interrelation between firms' innovation, corporate governance, and dividend policy. It presents a rationale behind empirical evidence of a positive relationship between management buyouts and innovation intensity. It provides empirical implications on firms' characteristics that facilitate management buyouts and the return and risk structure of private equity firms.

Private Equity Firms’ Reputational Concerns and the Costs of Debt Financing

Private Equity Firms’ Reputational Concerns and the Costs of Debt Financing

Financial Reporting Quality at IPOs Backed by Listed Private Equity Firms

Some private equity firms list their shares in stock exchanges and commit to regular and extensive public disclosures. In contrast, unlisted private equity firms contract and communicate privately with partner investors. We test whether capital markets benefit more from the public reporting model of listed private equity firms by comparing the reporting quality of IPO companies that are backed by listed private equity firms with those that are backed by unlisted private equity firms. We find that IPO companies that are backed by listed private equity firms report lower abnormal accruals, recognize losses faster, and experience higher post-IPO stock returns. The findings suggest that the public reporting model of listed private equity firms brings greater capital market benefits than the private reporting model of unlisted private equity firms.

The Effects of the Specialization of Private Equity Firms on their Exit Strategy

AbstractWe investigate how industry and stage specialization of Private Equity (PE) firms affect the likelihood to exit investments by means of trade sales, Initial Public Offerings (IPOs), or Secondary Buyouts (SBOs). Our empirical analysis relies on competing risks models. Using a sample of 818 Leveraged Buyouts (LBOs) by US and European PE firms over the period 2000–2015, we find that both industry and stage specializations of PEs increase the likelihood of exiting via IPO, whereas only industry specialization positively affects the likelihood of divesting through a trade sale. Finally, SBOs are more likely for non‐specialized investors.

MEZZANINE FINANCING: FUNDING CORPORATE GROWTH

ABSTRACT Profitable small to medium-sized businesses that have maxed out the amount banks are willing to lend their company due to high loan-to-value (LTV) ratios are left with few options for funding expansion. While giving up equity to private equity firms or additional individual owners is an option, owners and managers are searching for new ways to fund growth without giving up substantial equity. Mezzanine financing may be a good alternative because it falls between senior, collateralized debt and private equity funding. A review of the development of mezzanine funding is included, along with thorough, practical examples that show how mezzanine financing can bridge the gap for small businesses looking to fund growth. Keywords Convertible Debt: Debt that converts to equity Mezzanine Debt: unsecured, subordinated debt that typically requires higher interest rates than traditional, secured bank loans PIK Interest: Payable-in-Kind interest is interest that accrues and is added to

Value for Money? Private Equity in the UK Restaurant Industry, 2006-14

A widely held view of private equity says that the buyout ownership model offers a way to run companies better than more traditional models. If true, this has high value in both private and social terms. One might therefore expect to see fee structures that are designed to reward private equity firms for running companies better. This piece of empirical research shows that in at least one recent example that was not the case. The article uses something close to a controlled experiment that arose by chance in the UK restaurant industry between 2006 and 2014. Three similar restaurant groups co-existed in the UK during those years. Two of them were buyouts while the third was a long-established quoted company. A detailed financial analysis shows that neither buyout performed better in operational terms than the quoted company. In itself, this shows that neither private equity governance nor the so-called “discipline of debt” always ensures that private equity-owned companies perform better. The article goes on to look at how much investors would have paid for the returns they received under different ownership models. One of the buyouts delivered operating performance that was almost identical to the quoted company’s. It also delivered lower gross returns to its investors. Yet private equity fee structures likely saw investors in this buyout paying more to their private equity managers than they would have paid in the quoted investment, despite receiving lower returns. The article shows that private equity fee structures can pay high rewards even when operating performance and investor returns are average, or worse. It breaks new ground by looking at the relationship between gross investor returns, portfolio company operating performance and fees.

Understanding Potential Recharacterization and Subordination Attacks against Bridge Loans Made byVenture Capital and Private Equity Firms

It is not unusual for venture capital (VC) and private equity (PE) firms to make bridge loans to companies they control when those companies encounter financial distress and face a liquidity crunch. VC and PE firms should be aware of the potential attacks that may be brought against their position as bridge lenders in the event of an ultimate bankruptcy or insolvency of the borrower. Based on the law that has developed in the federal circuit courts of appeal, bridge loans made by VC and PE firms (and by others) in good faith and with some foresight should generally not be susceptible to successful attacks. The authors discuss the reasons why it is imperative to recognize the economic realities of modern finance and the frequently limited options available to financially distressed businesses. <b>TOPICS:</b>Private equity, financial crises and financial market history, legal/regulatory/public policy, portfolio construction

Appraisal Rights Limitations Coming to Delaware

Private equity firms and other investors in Delaware-based companies have, with increasing frequency, employed a strategy in which they vote against mergers or consolidations and then exercise their statutory appraisal rights provided under the Delaware Code. This profit-maximizing strategy, colloquially known as “appraisal arbitrage,” can work in cases where an investor believes the “fair value” of its shares is worth more than the price offered by the transaction. Some investors may have to rethink these strategies as Delaware Governor Markell recently signed a bill amending the appraisal rights statute, effective August 1, 2016. The amendments limit the ability of certain investors to engage in appraisal arbitrage following a merger. Only investors holding more than 1% of a company’s shares or shares valued at over $1 million dollars will have appraisal rights.

Competencies, Clusters, and Star Performance at a Leading PE Firm

Using the real-world laboratory of one leading private equity (PE) firm, the author attempts to directly connect professional competencies to performance outcomes and, more specifically, to skewed performance distributions. Although no published studies focus on the shape of PE return distributions, data presented in multiple studies indicate that returns are right-skewed at the level of funds and of individual portfolio company investments. At both levels, a small percentage of actors drive an outsized portion of returns. This article finds that professionals who lead outperforming investments tend to excel in three different clusters of competencies and related style elements (identifiable behaviors that may be based on groups of competencies). They display more robust and varied toolkits within each cluster than do professionals who lead underperformers, and these mixes of competencies contribute to investment outcomes in identifiable ways.

Competencies, Clusters, and Skews in Private Equity:Exploring the Investment Professional Competencies that Distinguish Extreme Outperformance at One Leading PE Firm

Using the real-world laboratory of one leading private equity (PE) firm, this paper attempts to directly connect professional competencies to performance outcomes, and more specifically, to skewed performance distributions. Though no published studies appear to focus on the shape of PE return distributions, data presented in multiple studies indicates that returns are right skewed at the levels of funds and individual portfolio company investments. At both levels, a small percentage of actors drive an outsized portion of returns. This paper finds that within one leading PE firm, this right skew exists at both the levels of individual investments and investment professional portfolios. The paper then leverages methods from organizational behavior, finance, and statistics to identify the mixes of investment professional competencies that distinguish right-tail outperformance within the firm, and then attempts to link these to investment outcomes. The paper finds that professionals who lead outperforming investments tend to excel in three different clusters of competencies and related style elements (identifiable behaviors that may be based upon groups of competencies), that they display more robust and varied toolkits within each cluster than do professionals who lead underperformers, and that these mixes of competencies contribute to investment outcomes in identifiable ways.

Value Creation and Value Transfer of Leveraged Buyouts: A Review of Recent Developments and Challenges for Emerging Markets

ABSTRACTAs available credit has tightened and fundraising has plummeted since the financial crisis of 2008, the private-equity (PE) sector has grown and matured in developed countries and shown strong growth in emerging countries, especially in Asia. This article studies the effect of wealth creation and wealth transfer by PE-backed leveraged buyouts (LBOs) on their stakeholders. We review the drivers of value creation and present the means through which LBOs are likely to transfer value. We also examine the tactics and strategies that LBOs use to capture and transfer value, and study emerging markets outside the traditional territories of LBO activities. This article reveals concerns that may be of interest to investors and regulators, elucidates clues for PE firms managing differences when investing in emerging markets, and provides an integrated view of LBO activities for countries seeking the introduction of private equity.

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.

How does acquisition experience create value? Evidence from a regulatory change affecting the information environment

We argue that acquisition experience translates more readily into learning to select than into learning to restructure. The acquisition selection stage is less causally ambiguous than the subsequent restructuring stage—because its web of activities is less complex and its outcome less delayed—and causal ambiguity undermines learning from experience. Therefore, we hypothesize that more-experienced acquirers will perform particularly well when the information environment is less transparent and thus the ability to select targets (versus to restructure them) is more important. Relying on a unique database of 1388 acquisitions realized by private equity firms in the United States between 1975 and 2005, and exploiting a regulatory change affecting the information environment faced by acquirers when selecting their targets, we find results largely consistent with our theory.

What do private equity firms say they do?

We survey 79 private equity (PE) investors with combined assets under management of more than $750 billion about their practices in firm valuation, capital structure, governance, and value creation. Investors rely primarily on internal rates of return and multiples to evaluate investments. Their limited partners focus more on absolute performance as opposed to risk-adjusted returns. 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.