Private Equity Industry Research Articles

Private Equity and Industry Performance

The growth of the private equity industry has spurred concerns about its impact on the economy. This analysis looks across nations and industries to assess the impact of private equity on industry performance. We find that industries where private equity funds invest grow more quickly in terms of total production and employment and appear less exposed to aggregate shocks. Our robustness tests provide some evidence that is consistent with our effects being driven by our preferred channel. This paper was accepted by Amit Seru, finance.

Synthetic Peer Benchmarking for Diversified PrivateEquity Programs

Private equity is … private. This means that it can be challenging to monitor, examine, and benchmark the performance of private equity investments. As pension plans, insurers, and endowments are making private equity a larger part of their portfolios, it is becoming more important to respond to this challenge. Various methods exist to value and benchmark the performance of a single private equity fund. These include the popular public market equivalent method and peer benchmarking that compares the performance of a private equity investment with the broad private equity industry. Most institutional investors, however, have a collection of private equity investments (a diversified program); and techniques that analyze and compare the performance of a diversified program have not been readily available. Hence, investors in diversified programs are in the dark about their performance relative to the broader industry. This study has developed a simulation technique to peer benchmark diversified private equity programs, using a large universe of underlying funds. The method considers a program’s exact composition and number of holdings. It overcomes three key challenges that have prevented peer benchmarking of diversified programs until now: a lack of comparable data, a misleading practice of averaging underlying performances of individual funds, and no visibility on the drivers of out- (or under-) performance.

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 . . .

Oregon Public Employees Retirement Fund: Push and Pull Over Gp/Lp Compensation

The case is designed to explore the structure and rationale behind the standard compensation arrangements in the private equity (PE) industry. It effectively introduces students to commonly used terms of limited partnership agreements (LPAs), such as fees, carried interest, and preferred terms or hurdle rates. The backdrop for the Oregon Public Employees Retirement Fund (OPERF) case is the changed market conditions following the 2007 financial crisis that spurred a reevaluation of the basic terms of LPAs across the PE industry. This case has been taught in a second-year elective course on entrepreneurial finance and private equity and would be suitable for similarly focused courses on venture capital, private equity, or entrepreneurship. The case can also be used in an investment class designed to explore private equity as an asset class. Excerpt UVA-F-1628 Rev. Oct. 21, 2016 Oregon Public Employees Retirement Fund: Push and Pull Over GP/LP Compensation As rain continued to fall outside the window of his Salem, Oregon, office in December 2008, Ron Schmitz, chief investment officer of the Oregon Public Employees Retirement Fund (OPERF), contemplated his response to a recent letter from TPG Capital, L.P. (TPG). The private equity (PE) firm was offering an opportunity for investors in TPG Partners VI, L.P., a global buyout fund, to reduce their commitments by 10%. The letter also stated that all investors would receive a reduction in the management fee from 1.50% to 1.35%, and TPG promised not to call more than 30% of a limited partner's (LP's) total commitment in 2009 without advisory committee approval. TPG created TPG Partners VI to pursue a broad range of equity and equity-related investments in buyouts and restructurings. TPG originally had targeted $ 18 billion to $ 20 billion for its latest flagship fund and had been successful in achieving a first closing of the fund in February 2008 and a final closing of $ 19.8 billion in September 2008. Unfortunately, the fund had stumbled out of the gate. Earlier in 2008, the firm had invested $ 1.35 billion from several of its funds, including TPG VI, into the since-collapsed Washington Mutual. It also purchased distressed bank loans that had since plummeted in value. Opinions differed as to the motivations behind TPG's offer. Was it an attempt to “make nice” with LPs, who were struggling with major liquidity issues, and a sign that in difficult economic times general partners (GPs) and LPs were “in this together”? Compared with Permira Advisers' offer to cut back commitments by 60%, TPG's offer was small. Did that suggest TPG expected investment opportunities to be plentiful in the near future? Was it merely a public relations gesture that would allow the fund to overcome some of its recent setbacks and raise a new fund sooner rather than later? Although offers to cut back commitments were not unprecedented—the last occurring after the burst of the dot-com bubble in 2000—they generally coincided with periods of market duress. These circumstances elevated the tensions between LPs and GPs and raised questions about whether the prevailing LP arrangement that governed the industry had the appropriate incentives and rewards to align both parties' interests. . . .

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.

Evolution of Private Equity Regulations in EmergingMarkets: A Case of India

Post liberalization in 1991, the private equity (PE) industry has played a significant role in India’s growth story, contributing more than $100 billion of stable long-term capital in the last 15 years. Owing to its fast emergence, the PE industry went from having ad-hoc regulation to a formal regulatory framework. This evolution presents a good case to study and understand financial policy making as it happens in emerging markets. This article is also a comprehensive guide for PE investors who want to understand the history and landscape of PE regulations in India. The authors track the evolution of regulatory environment for the PE industry in India, from SEBI (Venture Capital Funds) Regulations 1996 to the SEBI (Alternative Investment Funds) (Amendment) Regulations 2013, which govern the industry today. This historical study shows that while regulators in emerging markets are usually reactive rather than proactive, it also emphasizes the importance of effective regulation in boosting an important industry like PE. It highlights the fact that a regulator should not create regulations in isolation; it is critical to take inputs from different stakeholders to develop effective regulations.

Is Emerging Markets Private Equity Dying?

Portico Advisers' first research piece explores several existential challenges besetting the emerging markets private equity industry.

Perverse incentives of special purpose acquisition companies, the “poor man's private equity funds”

Special purpose acquisition companies (SPACs) are an alternative investment, structured as a one-shot private equity (PE) deal. Significant cross-sectional variation exists in SPACs' performance, which can be explained by the strong implicit incentives embedded in contracts. SPAC performance is worse for acquisitions announced near the predetermined two-year deadline, for acquisitions with deferred initial public offering underwriting fees, and for acquisitions with market value close to the required 80% threshold. Also, sponsors' involvement in the merged firm's governance improves long-term performance. This evidence has important implications given SPACs' high popularity in recent years and the new PE industry's trend toward deal-by-deal fund-raising.

Private Equity, the Rise of Unicorns, and the Reincarnation of Control‐based Accounting

This article discusses the rise of intangibles‐intensive companies and private equity (PE) since the late 1970s, and the role of both in bringing about the creation of a streamlined, more flexible set of accounting rules that, since their approval by the IASB and FASB in 2009, have been used by private companies and their investors.The PE industry comprises both venture capital (VC) firms that fund high‐growth enterprises and leveraged buyout (LBO) firms that fund more traditional, cash‐generating operations. Mainly because of the greater risks associated with both VC‐backed firms and LBOs—risks that make them ill‐suited for most public investors—such companies tend to require the more direct and active oversight provided by PE investors.And as the author goes on to argue, the more direct and active ownership of PE investors, as compared to the governance provided by most public‐company boards, suggests that financial accounting and reporting play a fundamentally different role in private than in public companies. Whereas the primary role of public‐company GAAP has increasingly (since the creation of the SEC in 1933) been to provide information for outside investors when valuing companies, the most important function of accounting reports in private companies is internal control—more specifically, ensuring that the interests of the managers of their portfolio companies are aligned with those of all the providers of capital. And recognizing this difference in the role of accounting, both the IASB and FASB responded to the requests of various parties (including private companies) by approving in 2009 the use by private companies of a streamlined and more flexible set of accounting standards.To the extent that the workings of PE markets continue to reduce the numbers of U.S. public companies, the author predicts that the resulting increase in the use of private‐company GAAP will continue to shift the primary role of accounting away from valuation and back toward its traditional roots in internal control and corporate governance.

Team Stability and Performance: Evidence from Private Equity

We examine the relation between team turnover and firm performance studying the private equity industry. Using a unique data set that tracks over time teams in 138 PE managers and their performance, we uncover a positive relation between turnover and fund performance. We propose and confirm in the data two channels that explain our findings: i) in the short-run, performance improves when bad performers are fired, ii) in the long-run, turnover helps teams to adapt and replenish their skills in response to shifting external demand. Our findings suggest that frictions coming from informational asymmetries may deter optimal turnover. These findings are surprising given the common belief among PE investors that team stability is key to long-term success.

Factors Driving Abnormal Returns in Private EquityIndustry:A New Perspective

Factors Driving Abnormal Returns in Private EquityIndustry:<i>A New Perspective</i>

Entrepreneurial Orientation: What Is It and Why Might It Be a Hidden Strategy for Building Long-Term Enterprise Value?

The private equity industry is constantly looking for new ways to build enterprise value. Success in this regard generates differentiated returns for general partners (GPs) and commensurate demand by limited partners (LPs) hoping to participate in the resulting gains in a subsequent fund. This study confirms that a new method to building long-term value is available by searching for companies that either already possess an entrepreneurial orientation (EO) or demonstrate dynamics where an EO can be created. Building such an EO culture is not easy, and it takes time and considerable effort to properly establish. Similarly, finding companies that already possess or have components of EO demands considerable focus, attention, and special due diligence foresight. The rewards of effectively finding or building an EO have been shown to yield competitive advantages that translate into performance gains that can last well into the long term. <b>TOPICS:</b>Private equity, analysis of individual factors/risk premia, in portfolio management, portfolio construction

The Cost of Private Equity Investing and the Impact of Dry Powder

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. We analyze whether the maturing PE asset class has become less costly over time. Costs are defined as the difference between gross and net returns (return spread) and provide a spread benchmark useful for investors to evaluate a fund’s costliness. Althoug return spreads have decreased over time, when controlling for falling gross returns causing lower performance-based fees, the cost of PE investing has increased. The higher costs are related to increased levels of unused capital (dry powder) because of swelling capital flows into the industry. The PE industry is thus a victim of its own success, suggesting that investors in the asset class should consider a more anti-cyclical investment approach.

Private Equity in Developing World: Bangladesh Perspective

Private equity can be described as the risk capital invested in the direct equity ownership of any non-listed private companies with a high growth potential. It has some solid advantage over other financial options; like private equity backed firms are efficient innovators and generate more employment and growth than their peer firms. Modern private equity industry have passed several decades to reach its present level. By the end of 2014, freshly committed dry powder hit a global record of USD 1.2 trillion, including USD 452 billion earmarked for buyouts alone (Bain & Company, Inc, 2015). Emerging markets from Asia region also have a vibrant private equity market with large number of active funds. While private equity market is almost absent in Bangladesh. Recently the market has received a few private equity funds coming in, setting up their offices here, and there are one-off investments that are done in conjunction with the International Finance Corporation (IFC). For a prospering private equity market to support investments, growth, competitiveness, and entrepreneurial activities policymakers should focus on the creation of an adequate setting. This paper is just a foot step towards this vast field of study. More intensive theoretical modeling; law and regulatory reforms etc. can be focused in future research work.

The Opportunity Cost of Venture Capital

Using a new set of risk benchmarks, the authors estimate the opportunity cost of equity capital for entrepreneurs, limited partners, and general partners of venture capital funds. The figures turn out to be well below the internal rates of return (IRRs) customarily targeted in the private equity industry. Those venture capitalists who keep employing target IRRs to discount cash flows may thus be risking a free fall into a loser’s curse—the systematic bypassing of potentially profitable investments deals.

Private Equity Minority Investments

In the maturing private equity industry, investments where the private equity fund owns a minority of the equity are gaining influence. They use different instruments for value creation than classic majority investments and involve other mechanisms of decision making. Therefore, understanding value creation in minority investments on a deal level is important. We find that overall returns of minority investments are below those of majority investments. Minority investments thus appear to offer a different type of risk–return relationship to broaden diversification for both general and limited partners.

The evolution of private equity: corporate restructuring in the UK, c.1945–2010

The article analyses the role of private equity (PE) in restructuring the UK corporate economy. It develops a theoretical synthesis to show that the evolution of the PE industry and firms in which it invested were governed by the relations of corporate governance between investor and investee companies. Effective governance relations were a necessary condition for success and complement firm specific resources to create competitive advantage. Four case studies are used to show the contrasting effects of these determining factors, Industrial and Commercial Finance Corporation (ICFC) and Slater Walker, and the two waves of buy-out centred restructuring that developed with the maturity of the PE industry after 1980. In contrast to the evolutionary approach, the periodisations utilised in this study show that structural breaks associated with points of institutional reform are also necessary to make firm specific resource and governance determinants of competitive advantage operable.

Intermediation in Private Equity: The Role of Placement Agents

Intermediation in private equity involves illiquid investments, professional investors, and high information asymmetry. We use this unique setting to empirically evaluate theoretical predictions regarding intermediation. Placement agent usage has become nearly ubiquitous, but agents are associated with significantly lower abnormal returns in the cross-section. However, returns are higher for funds employing a top-tier agent, and for first-time funds employing an agent. We also find evidence that agents may mitigate investment risk. Our results provide support for both the certification and influence peddling roles of intermediaries discussed in theoretical literature, suggesting heterogeneous motives for intermediation in the private equity industry.

Private Equity Market in Recovery

Abstract In the past three decades there has been an increasing role of Private Equity (PE) industry in the financing of enterprises especially in case of firms that have great growth potential but are in need of external financing. Via providing financing for these enterprises PE can boost economic growth. On the other hand the different subsets of PE like Venture Capital (VC) and Buyout (BO) funds appear as an important investment class and the return characteristics of these asset classes is an indicator of the performance of the whole PE industry. The authors in their earlier works focused on the history of the return characteristics of the funds in the US and in Europe found different trends and features in the two regions with regards to the different asset classes. In this paper the authors focus on the current progress of PE industry in Europe and in the US and examine the recovery of the industry from the recession of 2008. The current trends are consistent with our former findings. In average the returns of BO funds exceeded the returns of VC funds in the US as well as in Europe. Not just according to the absolute value of the returns, but also according to its risk-return tradeoff BO seemed to be a preferable investment. The gap between the performances of BO funds was not as significant as the difference of VC funds. While the recession of 2008 affected negatively the returns of PE, the ‘dotcom’ boom of the millennia had much higher impact on the industry, and our finding is that PE returns are on a recovery course.

Private Equity Investment Practices: A Comprehensive Study

The main objective of this article is to provide a comprehensive study and analysis of the private equity (PE) industry, to serve as a one-stop source of information for students and any other individuals with an interest in the PE industry. This article may also be very helpful as introduction to PE firms for newly hired analysts/associates. <b>TOPICS:</b>Private equity, equity portfolio management, performance measurement, global