Private Equity Industry Research Articles

The Performance of Private Equity Funds in India

Research on Indian private equity is only beginning to emerge, with most of it focused on development, case studies, and the life cycle of private equity returns. We examine a dataset of Indian private equity firms ‘exits from 2007 to 2012 to investigate three issues: First, we analyze the performance of private equity funds of exited investments in India. Second, we compare Indian private equity industry returns with public market returns; and third, we test performance persistence.

Demystifying the Challenges Facing Fundraising for Private Equity in the GCC Region

Seeking fresh commitments from LPs at large is becoming a harder mandate to fulfill in the GCC region, and, with certain LPs, the process can be both lengthy and irritating. It requires a lot of patience and perseverance, as well as advance planning and compromise on the part of the GP, especially in light of the fact that some LPs have very elastic timelines and are not in hurry to make a decision, whereas the GP is under pressure to close. Therefore, be sure that you know your LPs well, and that you are able to accommodate their shifting sentiments and growing demands. Be innovative and come armed with a solid sales pitch, so you can execute a productive and effective fundraising campaign, which should include full disclosure of allocation of fees and expenses. LPs are becoming more sophisticated and demanding: Some have learned the hard way, by being burned by zombie funds. Many are less complacent, and are assertively focused on reducing the gap between LP and GPs; that is, they seek a better alignment of interest, governance, compliance, transparency, and disclosure. Consequently, GPs have to work diligently to find the optimal balance between their business model needs and their LPs’ demands, while upholding a high standard of fiduciary responsibility and honoring the limited partnership agreement, thus meeting their business economics requirements and protecting the integrity of the fledgling private equity industry in the GCC region.

Private equity investment and real estate development

Purpose– The purpose of this paper is to understand the trends and contribution of private equity (PE) investors in real estate development in India because the real estate sector in India had witnessed significant investments from PE firms in recent years.Design/methodology/approach– The study focused on residential segment of real estate development, as it is the largest among all the segments. Two types of analyses have been done in this paper: first was to compare residential projects with PE investment with those that did not have any PE investment. The results were based on an analysis of 453 residential projects. The second was an analysis of only those projects that had PE investment. This paper studied if there were differences in investment patterns between domestic and foreign PE investors, and dedicated and diversified PE investors.Findings– Projects with PE investment were larger, as compared to projects that did not have any PE investment. The results of this paper also showed that PE firms preferred to invest with developers who had significant experience in undertaking larger-sized projects. PE investments significantly happened in projects that were located in metro cities. While PE firms as a whole preferred to invest in project mode, domestic investors were more inclined to invest in a project structure as compared to foreign PE firms. Though foreign PE firms invested more amounts per deal on average, there was a negative relationship between foreign PE firms and the extent of their shareholding in the investment.Practical implications– Encouraging PE investment in real estate projects would contribute toward to increasing the transparency in the sector. Strengthening the domestic PE industry would increase investment flow for real estate projects. PE investors who are able to add value to their investments are able to obtain higher shareholding.Originality/value– Empirical research on Indian real estate industry is scarce because of the lack of transparency and availability of reliable data. This is one of the initial studies on the Indian real estate sector based on a robust dataset.

Are LPs Funds of Funds? Relationship Building in the Private Equity Industry

We investigate an informal yet important mechanism in the private equity industry that helps to reduce uncertainty: relationship building. Based on a large sample of private equity funds over the 1980-2010 period, we find that the general partners strategically allocate good funds to loyal investors, who in turn commit to invest also in new funds that are not ex-ante promising. In addition, this effect is stronger for venture capital (VC) funds and more popular among certain types of investors. The bargaining power of the relationship concentrates in the hand of GPs.

Private Equity and Venture Capital IndustryPerformance in Brazil: 1990–2013

This article investigates the performance of Brazilian private equity (PE) and venture capital funds between 1990 and 2013. The Spectra-Insper database is used for information about gross returns and multiples. Investment amounts are collected from what General Partners report in Private Placement Memorandum or that are hand collected by the CVM (Brazilian Security Exchange Commission) or other commercial sources. The performance of 46 funds is analyzed. The average IRR of Brazilian funds is higher than the average of U.S. funds over the same period. We observe that Brazilian funds with vintage years between 1990 and 1997 underperform U.S. PE funds on average, but those with vintage years between 1998 and 2008 outperform U.S. PE funds. This pattern may reflect a learning curve in Brazilian PE industry. We find evidence that performance in Brazil has a higher cyclicality than in the U.S., but this may be due to the small sample size rather than the emerging market effect.

Private Equity as Canary in a Coal Mine: Building the Ecosystem for Effective Global Financial Integration

A burgeoning private equity (PE) industry provides investment capital to build the capacity of an economy for innovation and entrepreneurial growth. We argue that for PE to contribute to this, capacity building requires effective systems for allocation of financial capital to the private sector and an ecosystem of supportive organizations. To illustrate these claims, we review the recent history of PE in the Middle East–North Africa region to contrast the PE industry in Middle East–North Africa, which stagnated after the financial crisis, with the industry in Turkey, which recovered quickly from a brief pause after the crisis and has thrived since 2008. Copyright © 2014 John Wiley & Sons, Ltd.

Private Equity and Venture Capital Industry Performance in Brazil:1990–2013

Private Equity and Venture Capital Industry Performance in Brazil:<i>1990–2013</i>

Private equity y venture capital: Diferenciación y principales características

El propósito de este artículo es explicar, desde la teoría, dos posibles opciones de financiación que tienen las empresas cuando éstas no pueden acceder a las fuentes tradicionales. La industria del Capital Riesgo surge así como una fuente alternativa de financiación. Esta industria opera a través de vehículos especiales de inversión llamados fondos Private Equity y fondos Venture Capital. En general, los primeros invierten en compañías maduras y desarrolladas, mientras que los segundos lo hacen en empresas nacientes y pequeñas. El ciclo de financiación que proveen estos fondos se estructura en tres etapas principales: captación de recursos, inversión y desinversión. En este artículo se explica la diferencia entre los términos Private Equity y Venture Capital, así como las principales características de las etapas mencionadas.

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.

A Lawyers Guide: Valuation Issues in Private Equity Funds

The first private equity fund was formed in 1978 by Kohlberg Kravis Roberts. Since then, the private equity industry has grown exponentially reaching its peak size in 2008 in which a record $680 billion was raised globally in commitments. Historically, this massive industry has somehow managed to fly under the radar; receiving minimal attention from federal lawmakers and regulators.As a result of last decade’s buyout boom coupled with the most recent recession, government agencies have begun to pay much closer attention to the private equity industry; leading to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010. Dodd Frank has enabled the SEC to increase its enforcement activity through examinations, audits, and stricter record-keeping standards. One of the SEC’s main interests/objectives is focused on how private equity firms value their assets and report their performance to current and potential investors.Valuation is an art not a science; however the guidelines that Dodd-Frank has imposed are a step in the right direction towards consistency. Investors need to be aware and mindful of the valuation method established in the Limited Partnership Agreement. In addition, investors should conduct extensive due diligence on documents received during the fundraising stage; paying particularly close attention to the performance history and track record of the fund sponsor, with an emphasis on the particular valuation method they used. Private equity firms on the other hand need to also be cognizant of the valuation being employed on their funds. Federal antifraud provisions of the federal security laws prohibit manipulating or otherwise misrepresenting the fund’s prices, which was evidenced recently in February of 2012 when the SEC opened an investigation into Oppenheimer Global Resource Private Equity Fund LP, alleging possibly inflated or exaggerated valuations of one of its holdings from a prior year.

Limited partner performance and the maturing of the private equity industry

We evaluate the performance of limited partners׳ (LPs׳) private equity investments over time. Using a sample of 14,380 investments by 1,852 LPs in 1,250 buyout and venture capital funds started between 1991 and 2006, we find that the superior performance of endowment investors in the 1991–1998 period, documented by prior literature, is mostly due to their greater access to the top-performing venture capital partnerships. In the subsequent 1999–2006 period, endowments no longer outperform, no longer have greater access to funds that are likely to restrict access, and do not make better investment selections than other types of institutional investors. Nevertheless, all investor types׳ private equity investments continue to outperform public markets on average. We discuss how these results are consistent with the general maturing of the industry, as private equity has transitioned from a niche, poorly understood area to a ubiquitous part of institutional investors׳ portfolios.

Skill Balance and Entrepreneurship

Lazear (2005) suggest that entrepreneurs tend to be Jack-of-All- Trades to engage in a variety of tasks when starting up a business. We reexamine the Jack-of-All-Trades theory of entrepreneurship by using a matched case-control sample constructed from a professional networking website. We test this theory in a group of 325 founders currently in the venture capital and private equity industry with 1571 matched controls. We find that the frequently documented effect of balanced skills on entrepreneurship does not exist under the matched case-control design.

The Cost of Private Equity

Private equity (PE) has developed into a well-established asset class with strong growth in capital commitments over the last decades. Consequently, fund returns have decreased over time and investors have become more cost conscious. Based on a unique data set of 358 PE buyout funds with vintage years between 1983 and 2007, we analyze whether the maturing PE asset class has become less costly over time. We define costs as the difference between gross and net returns (return spread) and provide a spread benchmark useful for investors to evaluate a fund’s costliness. Next, we show that, in line with our expectations, return spreads have decreased over time. However, when we control for falling gross returns causing lower performance-based fees, surprisingly, the cost of PE investing has increased. We relate the higher costs to increased levels of dry powder due to swelling capital flows into the industry. We conclude that the PE industry is a victim of its own success, suggesting that investors in the asset class should consider a more anti-cyclical investment approach.

Recasting Private Equity Funds after the Financial Crisis: The End of 'Two and Twenty' and the Emergence of Co-Investment and Separate Account Arrangements

This article examines the post-financial crisis trends in the private equity industry. Although most research has followed the pre-crisis trends, we show that investors are demanding the inclusion of more investor-favorable compensation terms in limited partnership agreements. Our findings suggest that these new terms not only provide the investors with more favorable management fee and profit distribution arrangements, but also give them more control over the fund’s investment decisions. Importantly, the new pattern also reveals the inclusion of more straightforward co-investment rights. Besides the contractual ‘improvements’, we observe that investors want to see more skin in the game from the managers/general partners.

When Private Equity Meets China: Clashes between Locked-In Transactional Models and Chinese Regulatory Regime

The article reviews the clashes between the locked in transactional models widely adopted in the private equity industry and the Chinese regulatory regime.

Introduction to 'The Going Private Phenomenon: Causes and Implications'

This essay introduces the papers presented at a conference at the University of Chicago Law School in June 2008, entitled Going Private Phenomenon: Causes and Implications. The papers will be published in a forthcoming volume of the University of Chicago Law Review. This introduction puts the papers in the context of the recent private equity boom and ongoing crunch, and it offers some preliminary views on the current and future state of the private equity industry.

Tax Law Influences on the Form and Substance of Equity Compensation in the United States

This brief essay was written for a forthcoming book by Prof. Zenich Shisido, Enterprise Law: Contracts, Markets, and Laws in the US and Japan (Edward Elger). It summarizes recent scholarship on the influence of tax law on equity compensation in the United States. The essay finds there is little evidence or reason to believe that tax law significantly influences the substance of equity compensation, meaning the mix between equity and cash compensation and the risk and term structure of equity compensation. For publicly traded firms, tax law generally and roughly is neutral in the choice between equity and cash compensation once costs and benefits to both the firm and the recipient are considered. Tax law probably also has not had much impact on the form of equity compensation in publicly traded firms. Tax considerations do seem to have had an impact on the form of equity compensation in the venture capital (“VC”) and private equity industries both at the start-up company level and at the fund level. There is an arguable tax bias against giving founders equity compensation in the form of founders’ common in start-ups in the VC industry. And there is arguable tax bias in favor of giving fund managers equity compensation in the form of a profits interest in the private equity industry, which includes the VC industry.But there are reasons to be skeptical about whether these tax biases have had much of an impact on the substance of equity compensation. Start-ups are so poorly engineered from a tax perspective that it is unlikely that tax considerations significantly influence the economic deal struck between founders and investors. If the tax cost of founders’ common was perceived as an impediment to using equity compensation, then the parties would redesign the deals to eliminate those costs. On the other hand, funds are so exquisitely well engineered from a tax perspective that that we can expect engineers to design around any tax rules that are more than a minor irritant. The co-existence of these poorly and exquisitely designed structures in the same industry is curious.

Convexity, Theta, and the Optionality of Investing in Private Companies

Convexity is the degree to which small changes in the characteristics of an investment cause large changes in the investment’s value. The convexity of an investment is a primary driver of long-term returns across asset classes, especially in private equity. Private equity practitioners lack the language and tools necessary to speak articulately about convexity and have gravitated toward using ambiguous terms that lack quantification. The private equity industry needs to adopt the language and mathematics of fixed income in order to clarify the discussion and measurement of convexity. Convexity is more important when investing with long-term private equity capital because the propensity to undervalue the time component of convexity is far greater in an illiquid market. <b>TOPICS:</b>Private equity, statistical methods, analysis of individual factors/risk premia, fixed income and structured finance

Financial Returnees as New Agents in East Asia: The Case of Korean Private Equity Funds

Although the standing of Anglo-American capitalism has been badly damaged by the global economic crisis, the return of the state in emerging markets is by no means assured. Over the past decade, financial processes originating in Anglo-American markets, such as derivatives, hedge funds and mergers and acquisitions (M&A), have made quiet headway in emerging markets. One of the transmission channels is financial returnees, defined as elites returning to domestic finance from either global finance abroad or from foreign financial institutions in their home countries. Many financial returnees pursue business agendas that parallel the Anglo-American model, while portraying themselves as local for domestic constituencies. These actions are now especially visible in the rise of private equity funds in emerging markets. This article defines the concept of a financial returnee and charts the impact of these individuals in importing the Anglo-American private equity model to Asia with Korea as the primary case study. Once foreign-controlled, the private equity industry in Korea is now domestically-run and financial returnees have been integral in this sector's short but important history.

Changes in the American Private Equity Industry in the Aftermath of the Crisis

The American private equity industry has been badly hurt by the financial crisis. After a short exuberant boom, it collapsed in 2008 and now faces three major challenges. First, the reduction of activity is sufficiently extensive that many general partners will be forced to quit the market. Second, investors are taking advantage of this situation to lower their costs and enforce better governance. Third, the industry is subject to regulations that seek to force it to be more transparent and may keep the largest players from taking excessive risks, especially in relation to the use of debt.