Private Equity Fund Managers Research Articles

The SEC turns up the heat on private equity expense allocations

Purpose To discuss the US Securities and Exchange Commission’s (“SEC’s”) increasing focus on disclosure and conflict-of-interest problems arising from how private equity fund (“PE Fund”) managers allocate expenses between management and fund investors. Design/methodology/approach This article summarizes the background of this focus on expense allocations and, drawing from the recent SEC enforcement actions focused on this issue, and identifies the types of both expenses and disclosures that have caught SEC attention. Findings After spending the first two or three years post Dodd-Frank raising awareness of these issues, the SEC has begun to impose large fines over expense-allocation conflicts and disclosure issues. Practical implications It is imperative for PE Fund managers to retain counsel to review their fund offering documents, expense allocation practices, and compliance programs to ensure consistency with the SEC’s recent decisions on these issues. Originality/value Practical guidance from experienced financial services lawyers.

Market Timing and Agency Costs: Evidence from Private Equity

Private equity (PE) funds operate at the interface of private and public capital markets. This paper investigates whether PE fund managers have private information about the valuations of publicly traded securities. Using a dataset of cash flows from 941 buyout and venture funds, I show that PE funds’ distribution patterns predict returns of public securities in the industries of the funds’ specialization, but fund managers tend to sell at the market peaks only when they have performance fees to harvest. I find that the cost of this agency tension increases in the manager’s survival risk and that the managers’ knowledge pertains to the public firms’ future earnings rather than the discount rates. My tests distinguish market timing from reactions to the variation in risk premia and spillover effects of PE activity on public firms. The results help better understand PE performance and have strong implications for PE manager selection. It follows that PE activity embeds private information into the prices of public securities.

Estimating Skill in Private Equity Performance Using Market Data

Are private equity fund managers that earn persistently higher returns truly skilled, or are they just lucky? Using a novel approach that overcomes concerns about the integrity of both the data and the empirical methods that have been commonly used in prior studies of private equity persistence and skill, I find evidence of skill for Buyout and Mezzanine fund managers, however the evidence is mixed for Venture and Funds-of Funds. I then show that preferred transaction type is a channel through which skilled private equity fund managers differentiate themselves from unskilled ones.

IPO in Private Equity Finance: Evidence from Poland

The purpose of this article is to explore the factors that influence the decision of venture capital and private equity managers to go public in Polish capital market. Research methods cover the comparative analysis of scientific literature documents and reports as well as statistic data. A questionnaire survey was used as one method of data collection. Research results indicate that in Poland as well in the CEE region, the most common exit route for venture capital and private equity-backed companies is trade sale. However, initial public offering (IPO) exit is generally the most preferred by private equity fund managers.

Non-bank finance for firms: the role of private equity funds in Italy

Using fund-, firm- and bank-level data, we investigate the investments of the Italian private equity (PE) funds, with a focus on the north-western regions of Italy, where both the PE fund managers and their investments are heavily concentrated. The average size of the portfolios is small by international standards, and their concentration by firm has been growing after the 2008 crisis. The average duration of investments is rather short (about 3.7 years), and less than 10 % of them target firms that are both young and innovative. PE investments by Italian fund managers are still underdeveloped, relative to traditional bank credit. We find that being participated by a PE fund increases the amount of credit obtained by the target firm and the number of bank relationships, whereas it leaves the cost of credit unaffected. The effect of the PE fund participation is exclusively related to the entry of the fund in the firm’s capital, as it fades away as soon as the fund exits from the capital, thus suggesting a weak signalling role of PE towards banks.

Rewarding Risk-Taking or Managerial Skill? The Case of Private Equity Fund Managers

Compensation of private equity fund managers typically consists of a fixed management fee and a performance related carried interest which entitles managers to option-like payoffs. We consider whether this structure tends to reward excessive risk-taking rather than managerial skill. Our model of manager compensation is based on risk-neutral pricing techniques in an equilibrium framework where investors earn zero abnormal returns net-of-fees. When the model is calibrated to a set of buyout funds, our results demonstrate that managers indeed have an incentive for excessive risk-taking in case only fee income from the current finite lifetime fund is considered. In the more realistic setting where managers take into account potential compensation from follow-on funds, the risk-taking incentives will depend on the manager’s level of skill. Our model illustrates that the typical contractual arrangements can serve as a means of limiting possible risk-shifting behavior during fund lifetime. Also, skilled managers in this setting even have an incentive to reduce fund risk. Based on our sample of buyout funds we further show that the typical compensation structure is costly. Managers must generate substantial alpha in order to compensate investors for bearing the given fee components. Based on a standard compensation contract, annual break-even alphas amount to around 7 percent, and the present value of total compensation equals about 20 percent of committed capital.

Private Equity Exits in Emerging Markets

Encouraged by the prospect of higher returns in the increasingly open emerging market economies, private equity investors have sought ways to profitably invest in these markets. Unfortunately it has been found that investing in emerging markets may not necessarily be as easy as it seems. We seek to add to existing research in analyzing potential determinants of success in private equity markets in these emerging markets. Using deal level data from 2,733 private equity deals from 35 emerging markets between 1992 and 2012, we find that private equity fund managers have a higher probability of successful exits in countries with better business environments. We also find that more active management may potentially mitigate the potential costs associated with inefficient and corrupt business environments and thus increase the probability of successful exits in countries with higher levels of corruption. Moreover, our findings suggest that market shocks arguably concentrated in the developed markets result in a negative ripple effect as the probability of successfully exiting, especially by way of an initial public offering, decreases for private equity investors in emerging markets. Our findings are robust even after controlling for macroeconomic and security market conditions, cultural dimensions, deals, investors and investee firms’ characteristics as well as industry effects.

Private Equity Fund Performance and Persistency by Fund Type

This study investigates the private equity funds’ performances and persistence by fund type. Diversification benefit exists between public equity and private equity and among different types of private equity funds. The net IRR of private equity funds depends on fund type, economic growth, stock market performance, inflation and interest rate. Fund performance was negatively correlated with capital inflow to private equity market and fund size. Fund size and series are positively correlated. Performance persistency exists in private equity fund managers. Fund type is very important factor in analyzing private equity fund performance and persistency.

Inequality and Executive Compensation: Why Thomas Piketty Is Wrong?

A group of economists, among whom the French economist Thomas Piketty, produced a massive amount of data and statistics documenting the level and rise of economic inequality over long periods of time and across several countries.Making use of this information, Piketty wrote a book, which became the darling of the American, even global, left: Capital in the Twenty-First Century. The book paints a vivid picture of rising inequalities and predicts the inevitable concentration of wealth if States do not adopt radical measures. In particular, Piketty and his colleagues point to the growth in inequalities in Anglo-Saxon countries (especially the United States and Great Britain) due, according to them, to enormous increases in salary paid to executives of corporations listed on stock exchanges. According to Mr. Piketty, this phenomenon stems from the fact that, given current governance practices, executives essentially set their own salary. As result of the evolution in standards since the Reagan and Thatcher era, American and British corporate executives, asserts Piketty, get lavish compensation without facing opprobrium and social push-back. The corrective measures proposed by Thomas Piketty are dramatic but politically unrealistic: increase in the marginal tax rate to 80% and a global tax on capital.Indeed, most of the executive compensation in the form of options or stocks is taxable at the rate applicable to capital gains (15% in the United States) and not at the rate applicable to employment income. As well, the humongous income of hedge fund managers and private equity fund managers, usually defined as carried interest is thus shielded from the personal income tax rates. A significant increase in the tax rate on capital gains (not proposed by Piketty) would have a negative effect on investments and economic growth. Piketty also proposes a global tax on capital. This proposal, which entails an Orwellian process of disclosure and estimation of assets by all individuals, as well as a transnational sharing of the information thereby collected, has only an infinitesimal probability of being adopted. Piketty and his colleagues therefore propose two measures, one based on a poor understanding of the dynamics of executive compensation and of changes in the financial industry, and the other on a program that is doomed from the start. However, it is possible to take concrete and effective action to have a clear and significant impact on economic inequality. Here are ten policy proposals that are within the reach of governments or corporate boards.

Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance

Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance

Market-Timing and Agency Costs: Evidence from Private Equity

Private equity (PE) funds operate at the interface of private and public capital markets. This paper investigates whether PE fund managers have private information about the valuations of publicly traded securities. Using a dataset of cash flows from 941 buyout and venture funds, I show that PE funds’ distribution patterns predict returns of public securities in the industries of the funds’ specialization, but fund managers tend to sell at the market peaks only when they have performance fees to harvest. I find that the cost of this agency tension increases in the manager’s survival risk. My tests distinguish market-timing from reactions to the variation in risk premia and spillover effects of PE activity on public firms. The results help better understand PE performance and have strong implications for PE manager selection. It follows that PE activity embeds private information into the prices of public securities.

The Limited Partnership Model in Private Equity: Deal Returns over a Fund's Life

Private equity (PE) fund managers recurrently close limited partnerships, thereby running several funds simultaneously. Conceptually, the limited partnership model as a form of financial intermediation should not have any impact on decisions about single PE investments and returns. This study takes advantage of a unique database containing cash flow data on 10,566 investments by 702 PE limited partnerships. We note a robust drop in investment returns once a new limited partnership is established. This pattern has increasingly emerged since the late-1990s. We conclude that the current governance form of limited partnership model is of questionable benefit in a matured PE industry.

Early-stage venture capital in South Africa: Challenges and prospects

The aim of this paper is to assess which factors impact the development of early-stage venture capital in South Africa. Factors identified for other markets and countries are explored and their relative importance in South Africa determined from the perspective of market participants. These include venture capital and private equity fund managers, government institutions, intermediaries and university research coordinators. The study used both an online survey, to capture a broad representation of opinion, and interviews, for in-depth responses. There was broad consensus among respondents with regards to the key factors requiring attention, which include the lack of funds targeted at early-stage investments, the lack of specialised fund managers, and the low entrepreneurial skillsets in the country. Through a detailed analysis of the responses, certain measures are proposed that can enhance the development of early-stage venture capital in South Africa such as engaging more with angel investors and improving the cooperation between the different market players in the sector.

Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance

We study the relations between management contract terms and performance in private equity using new data for 837 funds from 1984–2010. We find no evidence that higher fees or lower managerial ownership are associated with lower net-of-fee performance. Nevertheless, compensation rises and shifts to performance-insensitive components during fundraising booms. Further, the behavior of distributions around contractual fee triggers is consistent with an underlying agency conflict between investors and fund managers. Our evidence suggests that managers with higher fees deliver higher gross performance, and highlights that agency costs are an inevitable consequence of the information frictions endemic to agency relationships.

Private Equity Decision Making Using a Risk-WeightedOptimal Decision-Making Paradigm and NeuralNetworks

Private equity (PE) fund managers constantly face the problem of having an adequate selection of firms to invest in. Optimal investment decisions are of high importance to PE funds because there is a greater degree of risk associated with them than with traditional investments, which tend to be more objective in terms of risk–return profiles. This article analyzes and details the various factors that affect the investment decisions of PE funds and reveals two models to determine the optimal investment candidate from a set of probable candidates: a risk-weighted fuzzy optimal investment model and a neural-network-based optimal investment model.

The European Commission adopts AIFMD implementing regulation

PurposeThis article aims to outline in depth the European Commission's adopted implementing rules (the Regulation) for the Directive on Alternative Investment Fund Managers. These new regulations have been eagerly awaited by private equity fund managers and their investors who have been seeking a measure of certainty about how the AIFMD will be transposed into local law.Design/methodology/approachThis piece summarizes some of the key points of the Regulation.FindingsThis article addresses the rules in the Regulation concerning: the calculations of assets under management; capital requirements in relation to professional liability risks applicable to alternative investment fund managers; operating conditions for alternative investment fund managers, including liquidity management, organizational requirements and rules on valuation; conditions for delegation; rules on depositaries, including the depositary's tasks and liability; transparency, reporting and disclosure requirements; and rules for cooperation arrangements.Practical implicationsThe Regulation supplements certain elements of the Directive and contains implementing rules that will have direct effect in EU member states on application without the need for national implementing legislation. By discussing some of the highlights of the Regulation, the article will help fund managers and investors gain a better perspective of the AIFMD, which is useful from both a compliance and business planning standpoint.Originality/valueThis piece is of value to those private equity fund managers and investors looking for guidance as to how to digest the Regulation and the implications of these new measures on their respective businesses, as well as the investment marketplace as a whole moving forward.

Private equity and the competitiveness of Polish enterprises

The objective of the article is private equity and venture capital investments and their influence for companies activity. The article presents author’s own studies of the private equity investment influence for the enterprise activity. Comparing venture-backed firms and others shows, that venture-backed companies patent more than others firms and their ideas are higher technological and economic values. The vast majority of polish managers believe their company would not have existed or would have grown less rapidly without venture capital. Respondents also believe that venture capital funding encouraged employment, investment, R&D spending and export. An important source of empirical data are performed author’s own surveys and interviews with representatives of shareholding companies, as well as with private equity fund managers. Years of research: 1998-2009. The study used several research methods: a descriptive method, the method of comparative analysis, using the method of critical analysis and synthesis applications.

Web Appendix to 'The Tax Advantage to Paying Private Equity Fund Managers with Profit Shares: What is it? Why is it Bad?'

This paper is the web appendix referenced in The Tax Advantage to Paying Private Equity Fund Managers With Profit Shares: What is it? Why is it Bad? 75 University of Chicago Law Review 1071-1053 (2008)The paper 'The Tax Advantage to Paying Private Equity Fund Managers with Profit Shares: What is it? Why is it Bad?' to which these Appendices apply is available at the following URL: http://ssrn.com/abstract=996665

Sub-Optimal Risk–Return Profiles in Private Equity: The Case of Minority Business Enterprises Investing

The influence of socially responsible investing (SRI) on large and listed companies is limited. Private equity could be successful but methods have to be adapted to avoid the costs associated to SRI post-investment monitoring. Criteria have been applied in the investment screening process, notably in minority-related private equity investments. Despite its promising endeavour, minority-related investing is still not part of mainstream private equity, because the minorityrelated private equity risk–return profile is sub-optimal. The roots of the underperformance lie in the definition of intervention of private equity fund managers focusing on different opportunities. The author suggests that these private equity fund managers redefine the scope of their intervention from geographical or ethnical criteria to underprivileged people. Private equity fund managers will need to redefine the way they create value for their portfolio companies. The extra work would result in risk reduction and benefit usual private equity investors. <b>TOPICS:</b>Private equity, ESG investing, fundamental equity analysis, risk management

Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance

We study the relations between management contract terms and performance in private equity using new data for 837 funds from 1984-2010. We nd no evidence that higher fees or lower managerial ownership are associated with lower net-of-fee performance. Nevertheless, compensation rises and shifts to performance-insensitive components during fundraising booms. Further, the behavior of distributions around contractual fee triggers is consistent with an underlying agency conflict between investors and fund managers. Our evidence suggests that managers with higher fees deliver higher gross performance, and highlights that agency costs are an inevitable consequence of the information frictions endemic to agency relationships.