Private Equity Portfolio Research Articles

The performance of private equity portfolio companies during the COVID-19 pandemic

We study the performance of PE-backed companies during the COVID-19 pandemic. Our findings suggest that, on average, PE-backed firms were more resilient compared to closely matched industry peers during the pandemic. However, this outperformance is of a smaller magnitude than during the pre-pandemic non-crisis period, suggesting that the outperformance is driven by investor selection of target firms ex ante, rather than active support mechanisms. The outperformance during the pandemic is found to be insignificant among firms which were the most vulnerable at the onset of the pandemic, and firms in the most exposed industries. These more vulnerable firms appear to have been less active in obtaining additional financing during the pandemic, and consequently, suffered a significantly higher incidence of distress. However, non-PE-backed firms in distress had a higher incidence of liquidation, while PE-owned firms more often negotiated formally with creditors to continue trading. Our analysis shines light on the role of PE investors during a large, exogenous shock, and suggests that, in the case of the pandemic, their adept target selection may help to explain the outperformance more so than their actions to protect vulnerable firms in a crisis.

Private Equity Exits in the CEE:

Purpose of the article: The purpose of this article is to assess private equity exit strategies of CEE portfolio companies with regards to desired exit routes, including a cross-border deal aspect and a pre-exit holding period.Methodology/methods: This paper employs secondary data from the Mergermarket database containing information on more than 20 thousand private equity M&A deals and IPOs. General scientific methods such as analysis, comparison or generalization were used.Scientific aim: Only limited amount of research was carried out on the private equity exits in the region of central and eastern Europe. This study aims at shedding new light on understanding of private equity exit route decisions and timing in this particular geographic area.Findings: Exiting a CEE portfolio company, private equity investors tend to prefer exiting via trade sales over secondary buyouts or IPOs. They also tend to prefer foreign acquirers over domestic ones. A typical pre-exit holding period averages around 5 years.Conclusions: Our results show that while exiting a CEE portfolio company, private equity investors tend to divest by selling the company to a strategic investor (trade sales) rather than a financial investor (secondary buyouts) or exiting via an IPO. While exiting via trade sales and secondary buyouts, private equity investors tend to prefer foreign acquirers rather than domestic ones with a strong preference of acquirers from outside of the respective region. Typical holding period of a CEE private equity portfolio company remains on average in line with academic theory. Our paper contributes to the developing literature of private equity by using an extended and up to date dataset and introducing the research on the cross-border aspect of PE exit strategies.

Increasing the EBITDA of private equity portfolio company through digital enablement

The study of the role of digital implementation in increasing earnings before interest, taxes, depreciation and amortization (EBITDA) in portfolio companies of private equity funds is a topical issue for the development of strategies and competitiveness. Thus, the main purpose of the study was to determine how private equities increase EBITDA in the portfolio companies via digital enablement. For the purpose of understanding the role of digital enablement strategies in value creation, the critical realism research paradigm was identified as the best-fit philosophy. The critical realism approach was chosen because it advances research methodologies through the development of a qualitative theory of causality. A sample of 26 respondents was used with semi-structured interviews being conducted. The data analysis process involved the identification of 3 themes through thematic analysis. Three themes were identified, namely new digital capabilities to improve top-line growth, driven by the Head of Strategy/Head of Department, and transformative initiatives. The results from all three themes indicate that digital enablement is useful in improving private equity firm revenue and EBITDA levels through digital transformation, improved customer engagement, and identification of market opportunities towards digital data capabilities. The findings show that redefinition is critical to improving EBITDA, as it challenges the existing model and provides a forward-looking approach to strategy formulation. Digital enablement strategies are an unexplored area in the context of private equity firms. The strategies are momentous in improving revenue levels and competitiveness while accentuating the EBITDA rates by cost reduction. The results of this study will be of practical use to both businesses and other economic entities

Takahashi–Alexander Revisited: Modeling Private Equity Portfolio Outcomes Using Historical Simulations

In 2001, Dean Takahashi and Seth Alexander of the Yale University Investments Office developed a deterministic model for estimating future cash flows and valuations for the Yale endowment’s private equity portfolio. Their model, which is simple and intuitive, is still commonly used by investors to this day. However, the model possesses significant shortcomings, including its sensitivity to the assumptions necessary for the model to function and its failure to provide a range of possible portfolio outcomes. Both issues can result in investors developing overconfidence in forecasts, which can result in suboptimal—or even adverse—portfolio management decisions. To address these shortcomings, we propose a novel historical simulation approach that preserves the simplicity and intuition behind Takahashi and Alexander’s approach. However, our model, which leverages historical private equity cash flow data, requires no user assumptions and naturally provides a range of outcomes. We explore this model in some depth, highlighting the model’s power and flexibility across myriad use cases.

Optimizing Investment Period Length and Strategies for Private Equity Portfolios with Rounds of Financing

Optimizing Investment Period Length and Strategies for Private Equity Portfolios with Rounds of Financing

Value creation in private equity portfolio companies: a structured review of evidence and proposed framework

ABSTRACT Value creation of private equity (PE) firms in portfolio companies has received much attention in research. This systematic literature study aims to review, evaluate, and organize the empirical studies conducted in this field during the last four decades. Our findings from an in-depth analysis of 110 empirical papers reveal that the current understanding is incomplete, inconsistent, and unbalanced. Currently no consensus exists regarding a taxonomy or framework that encompasses all relevant dimensions and structures in the field. To guide future research, the study proposes a framework for value creation inputs, outcomes, and context factors. Constructed on a theoretical basis of agency and resource-based theory, we define distinct roles PE firms take in portfolio companies and specify an underlying typology of value creation levers that are applied. Additionally, we discuss the current research on outcomes of PE value creation efforts, and we identify and structure currently underrepresented context factors that influence value creation. Finally, we highlight potential avenues for future research, focusing on influential context factors and levers that catalyze growth in portfolio companies.

Covid-19 Pandemisinin Sektörel Ölçekte Mali Analizi: Getir Girişim Sermayesi Örneği

Covid- 19’ un küresel ölçekte tehlikeli bir salgın halinedönüşmesi ile ülkeler çeşitli karantina süreçlerini kapsayankısıtlamalara gitmişlerdir. Bu kısıtlamalar sürecinde bazıfirmalar kişilerin kısıtlama alanları içerisinde hizmet alımınadevam edebilmesi için online sipariş verebilecekleri çeşitliuygulamalar geliştirmişlerdir. Birçok sektör Covid-19’ungetirdiği yeni şartlara göre yeniden yapılanma sürecinegirmiştir. Pandemi süreci dijitalleşmenin yaygınlaşmasına veonline alışveriş şirketlerinin çoğalmasına neden olmuştur. Buhizmetlere olan ilgi pandemi’nin etkisiyle aşırı talep görür halegelmiş ve önemli bir büyüme yönünde ivme kazanmıştır. Buuygulamalardan birisi de RE-PIE Gayrimenkul ve GirişimSermayesi Portföy Yönetimi A.Ş. Getir Girişim Sermayesininkurmuş olduğu “Getir” uygulamasıdır. Bu çalışmanın amacı,RE-PIE Gayrimenkul ve Girişim Sermayesi Portföy YönetimiA.Ş. Getir Girişim Sermayesinin kurmuş olduğu “Getir”firmasının pandemi öncesi ve sonrası finansal açıdan etkilerinigörebilmek için finansal analiz yöntemlerinden birisi olankarşılaştırmalı tablolar analizinin yapılmasıdır. Çalışmakapsamında, Covid-19’un sektörel etkileri ele alınmış Covid ’inetkilerini sektör bazlı görebilmek adına gerekli literatür taramasıyapılmıştır. Çalışmada karşılaştırılmalı tablolar analizi hakkındabilgi verilmiştir. Çalışmanın yönteminde, işletmeninin BağımsızDenetim Raporlarınca; Bilanço Tablosu, Kâr veya ZararTablosu, Diğer Kapsamlı Gelir Tablosu, Nakit Akış Tablosu veToplam Değer / Net Varlık Değeri Değişim Tabloları 2019-2020-2021 yılları baz alınarak karşılaştırmalı tablolar analiziyöntemine tabi tutularak incelenmiştir. Bu çalışma sonucunda;kısıtlamalar nedeniyle küresel ölçekte bazı sektörlerde daralmalaryaşanmasına rağmen, bu durum bazı firmaların büyümelerineve yüksek kârlar elde etmelerine olanak tanıdığı ve ülkemizdebüyük ilgi toplayan “Getir” uygulamasının pandemi öncesi vesonrası kıyaslandığında büyük bir başarı yakaladığı tespitedilmiştir.

Credit Market Equivalents and the Valuation of Private Firms

We propose to value private equity investments by credit market equivalents (CME). Our method relies on the observation that many portfolio companies held by private equity funds have loans and bonds traded in secondary markets. We exploit the market valuations embedded in these prices by constructing a stochastic discount factor that prices loan and bond returns of private equity portfolio company portfolios. To that end, we construct a dataset that carefully matches loan and bond price data with a proprietary data on cash flows of private equity companies at the portfolio company level. With our credit market implied stochastic discount factor, we can value the cash flows of the private equity companies to derive their CME valuation. Using machine learning variable selection techniques, we identify a five-factor model for credit market returns. Our method works as long as credit and private equity markets are sufficiently integrated, for which we provide supportive empirical evidence.

The Performance of Private Equity Portfolio Companies During the COVID-19 Pandemic

The Performance of Private Equity Portfolio Companies During the COVID-19 Pandemic

Post-COVID-19: Rising from the Ashes

This article details how a predictive risk model, combined with financial and legal deal structure and negotiation processes, will produce high-quality projects and secure cash flow, and can result in significant performance improvement of both margin and bottom-line earnings for private equity portfolio companies. <b>TOPICS:</b>Financial crises and financial market history, performance measurement <b>Key Findings</b> ▪ Portfolio margin improvement: Evidence shows that by scaling predictive analytics and harnessing data, a team of operational risk professionals can improve portfolio margins to the point where &lt;1% operational losses on billion-dollar portfolios are achievable, resulting in direct portfolio margin improvement. ▪ Accelerated earnings: Private equity firms can quickly implement a five-part strategy for operational risk management focused on the sales and delivery life cycle to accelerate earnings and create compounding growth annually across their portfolio companies. ▪ 99%+ earnings capture: By pairing an intelligent risk-sensing model with active deal and project intervention at the critical moment, it is possible to capture more than 99% of the revenue each year and drive it directly back into the business, positively impacting the value creation cycle.

Benchmarking the Performance of Private Equity Portfolios of the World’s Largest Institutional Investors: A View from CEM Benchmarking

The CEM database contains private equity true-time weighted portfolio returns net of investment costs, along with self-reported benchmark returns for some of the largest institutional investors in the world. To quantify performance, the article uses a consistent benchmarking methodology, employing geographic blends of small-cap equity indexes and showing that the method yields a better benchmark. From 1996–2018, private equity slightly underperforms the benchmark, indicating that the returns for private equity are comparable to those of listed equity. <b>TOPICS:</b>Private equity, performance measurement, equity portfolio management, statistical methods, style investing, pension funds <b>Key Findings</b> • Of the private equity benchmarks currently used by investors, most are flawed. A benchmarking method using listed small-cap equity, with a lag of between three and five months, is sufficient to benchmark most private equity portfolios. • The average private equity portfolio historically underperforms this simple investible benchmark. The average net value added from 1996–2018 is −0.67%. • Costs strongly affect relative performance; low-cost internal direct or co-investment private equity outperforms high-cost fund-of-funds private equity.

The Wates Corporate Governance Principles for Large Private Companies: A Weak Compromise at the Expense of Employees?

The aim of this dissertation is to make a deep investigation into the Wates Corporate Governance Principles for Large Private Companies and the new reporting requirements to assess if they meet, from an employees’ perspective, the ambition of the Government and Parliament committee to increase trust in British business, to “strengthen the voice of employees…at board level”2 and to avoid new corporate scandals such as the BHS collapse. The regime previous to the corporate governance reform (section 2.1.) and the current legal system (section 2.2.) will be reviewed on the basis of a two-limb test. The first limb consists of an evaluation of the emphasis given to employee interests in the board’s decision-making process and the measures foreseen to ensure such a level of consideration in practice. The second limb of the test is based on the lesson learnt from the BHS collapse and assesses the effectiveness of ex-ante mechanisms that prevent corporate failures from happening. The result of this analysis highlights serious shortcomings in the company law regime and shows that the Wates Principles combined with the new reporting requirement should be taken with a pinch of salt. The remedy proposed by this dissertation takes the form of the “enhanced independent director” designated by a special committee elected by and amongst the workforce. This newly created position is part of a wider internal system of newly created committees and will be explained in more detail in section 2.3.1.2. The enhanced independent director takes a key role to ensure the operationalisation of the enlightened shareholder value at board level (limb one) and to prevent new corporate failures by monitoring related party transactions (limb two). The overall assessment is based on the premise of a wholly owned company without any minority shareholder, which are very common amongst private UK companies (e.g. familyowned or private equity portfolio companies).

Private Equity Portfolio Companies: A First Look at Burgiss Holdings Data

This paper provides a first look at newly available data on the holdings of private equity (PE) funds. Because research has been hampered by the lack of comprehensive, high-quality data on portfolio companies, this new source offers the potential for a wide range of research. Provided by Burgiss, a global provider of data and analytics to investors in PE funds (limited partner investors or LPs), the data are gathered from the financial reports of general partners (GPs) to LPs who are Burgiss clients. The sample covers over 45,000 investments in funds’ portfolio companies (in buyout and venture capital); moreover, the coverage is expected to grow through a phased release process. The paper describes preliminary findings on sample characteristics and offers a high-level view on aspects of performance in hopes of inspiring additional research. Returns to investments in portfolio companies are highly variable and skewed. This is particularly true of venture capital where many investments turn out worthless and average performance is boosted by a few spectacular successes that create the bulk of fund value. Performance is related to a number of factors (including investment size, duration of the investment and levels of fund raising), with patterns differing for buyout and venture capital investments.

Fitting Private Equity into the Total Portfolio Framework

In this article, the authors propose a risk estimation model that addresses both smoothness and idiosyncratic risk dynamics of narrow private equity portfolio returns. The authors subsequently apply the model to a broad set of private equity return streams with tightly controlled diversification properties. They show that increased model complexity is detrimental to the model’s forecasting power and that idiosyncratic risks increase as one goes between hypothetical investment in a broad (albeit noninvestable) private equity index and a real-life, narrowly diversified portfolio of private equity funds. The authors also find that private equity returns have demonstrated a level of exposure to public equity markets that may be considered surprisingly low and offer a possible qualitative justification for this phenomenon. Finally, the authors incorporate the newly obtained private equity risk model into a general portfolio construction framework and demonstrate how to study the inevitable trade-offs between the costs and benefits of increased portfolio diversification. <b>TOPICS:</b>Portfolio theory, portfolio construction, equity portfolio management <b>Key Findings</b> • By applying a somewhat novel econometric technique to a proprietary dataset, we offer a way to separately estimate systematic and idiosyncratic risks of private equity (PE) programs. Our methodology controls for data overfitting and program concentration. • Observed volatility and equity beta of PE are much lower than that of public equity. We believe this is not an aberration but instead a fundamental consequence of PE being less exposed to the excess volatility of public equity markets. • With the exception of the tumultuous period of the global financial crisis (GFC), risk properties of private equity have been surprisingly persistent; if anything, systematic risks of private equities decreased slightly after the GFC.

IPO as a VC-Funds Type of Exit

The key characteristic of private equity finance is that investors hold their investments only for a limited period of time. The key goal of VC funds is to grow the company to a point where it can be sold at a price that far exceeds the amount of capital invested. This process is called an exit or divestment. There are three basic types of exits: going public, being acquired by a larger corporation, a sale to a third-party investor.It is a widely believed and accepted proposition in private equity literature that the initial public offering of a private equity portfolio company is the most successful and profitable exit opportunity. However, according to the few sources of literature, public offerings are not the preferred divestment type for venture capital firms. Going public is one of the most critical decisions in the lifecycle of a firm. This is not easy, as the process is very comprehensive and complex. Hence, a lot of considerations should be taken into account. Because every investee firm is different, a development plan to achieve a successful exit takes into consideration a number of macroeconomic and microeconomic factors. Moreover, several advantages and disadvantages of exit through an IPO could be indicated. The objective of this paper is to show the success and profitability of going public by VC funds. The VC’s exit type as a way of cashing out on its investment in a portfolio company is a consequence of the exit strategy, which means the plan for generating profits for owners and investors of a company. While an IPO is the most spectacular and visible form of exit, it is not the most common one, as historically in the US it was, but still in Europe it has not been yet. There will be both literature and statistical data coming from different studies and reports used in this research.

A dual portfolio approach to a student managed fund

PurposeThe purpose of this paper is to describe an investment program that offers students with the opportunity to simultaneously manage a private asset fund and a public asset fund. The program has been in operation since 2013 and has made significant progress in student placement and connectivity with local, regional and national financial firms.Design/methodology/approachThe authors describe the structure, methods used and challenges encountered in this dual portfolio environment and add relevant thoughts for discussion. The authors discuss potential conflicts of interests that may arise in managing a private equity portfolio, the concern of proper deal flow, the issue of the investment timeline when investing in private equity and the problems encountered when measuring private equity performance.FindingsWhile public asset funds have been around for decades and are relatively well accepted throughout all levels and types of higher education institutions. The uses of private equity funds, though not unheard of, are much less prevalent. Allowing the same group of students to manage both type of portfolios is relatively unique and provides with a more comprehensive learning experience.Originality/valueA primary distinguishing attribute of this program is that accepted students are given the opportunity to simultaneously manage both public and private equity assets throughout an academic year. The goal is to create a comprehensive portfolio management program that replicates a changing investment management environment where private equity is an increasingly significant asset class.

Private equity portfolio company fees

In private equity, general partners (GPs) receive fee payments from companies whose boards they control. Fees amount to $20 billion evenly distributed over time, representing over 6% of equity invested by GPs. They do not vary with business cycles, company characteristics, or GP performance. Fees vary significantly across GPs and are persistent within GPs, even after accounting for fee rebates to limited partners (LPs). GPs charging the least raise more capital postfinancial crisis and are backed by more skilled LPs. GPs increase fees prior to going public. We discuss how these results could be explained by optimal contracting and tax arbitrage.

Private Equity Performance Attribution

Performance attribution is an important aspect that completes the feedback loop in the investment process but is rarely utilized in the private equity industry. In this paper, the author provides a framework and inputs for performance attribution in private equity portfolios. By employing this flexible framework, all types of private equity investors can evaluate why their performance was different from that of the benchmark and fine tune their investment decision process to improve future results.

Paul Capital and Project U: Secondary Sales of Private Equity Stakes

At a time of market turmoil, a university investment manager wants to unload the school's entire private equity portfolio; yet no public market exists, so the assistance of a partner at a PE firm is sought. This case provides an introduction to a range of secondary transactions and the valuation challenges that arise. Excerpt UVA-F-1626 Rev. Oct. 10, 2011 PAUL CAPITAL AND PROJECT U: SECONDARY SALES OF PRIVATE EQUITY STAKES Fall 2008 was a period of unprecedented market turmoil. Day after day, the headlines reported large declines in stock prices as waves of selling hit the market. Following the bankruptcy of Lehman Brothers in September, the S&P 500 had declined more than 50% from its 2007 high. Hedge funds were hit with redemption requests, causing them to liquidate securities. Even the hallowed halls of academia did not escape the carnage. Following the lead of Harvard and Yale over the previous decade, university endowments had aggressively increased their allocations to private equity (PE) and other so-called alternative investments. While these investments had often produced impressive returns, the previously favorable view of the sector quickly soured. As the value of the investments fell, they could not be easily sold because no public market existed for them. Further, investors in PE funds faced prospective capital calls that required them to put up additional capital. With cash in short supply, universities and other limited partners (LPs), facing budget pressures and investment losses, looked to unload their stakes in private equity. It was in this context that Patrick Derry, a partner at Paul Capital, had been contacted in November 2008 by an investment manager at Rhodes University seeking to sell its $ 162 million commitment to private equity. Derry had a good relationship with the investment manager and knew that the endowment was an LP with high-quality interests in PE funds. Because of his relationship and Paul Capital's reputation, this would be an exclusive deal to purchase the entirety of the endowment's holdings, if agreement could be reached on terms. In November, the investment committee at Paul Capital had authorized proceeding with “Project U” and had given the go-ahead for the first phase of due diligence. In February 2009, with the first and follow-up phases of due diligence completed, Paul Capital was nearing completion of a final offer to present to the endowment's investment committee. After investing nearly three solid months of work on the deal, Derry recalled, “It's often difficult to truly judge the seller's motivation. In this case, given what happened in the fall, we felt pretty good about the university's need to sell, but all that can change once a seller sees the size of the discount.” . . .

Does Culture Affect Operating Performance in Private Equity Buyouts?

Using a dataset of 583 private equity (PE) leveraged buyouts (LBOs) from 14 European countries, we examine the moderating impact of national culture on the operating performance of PE portfolio companies. We argue that high performance orientation of a society positively affects operating performance development because it aligns incentives with PE sponsors who need to satisfy high return expectations in a short period of time. In our baseline estimates, we find that PE-backed firms outgrow their respective industries significantly in terms of total assets and employment post-LBO. A country’s performance orientation reinforces this effect: A one standard deviation increase in countries’ performance orientation is associated with an industry-adjusted rise of about 11% in total assets and more than 6% in employment over the course of four years, respectively. Independent of a country’s performance orientation, PE-backing does not meaningfully impact post-LBO profitability, which suggests a growth profitability tradeoff. We also test whether growth comes at the expense of higher leverage and thus higher risk, but cannot find a significantly higher debt burden in performance oriented societies. Thus, our findings indicate that portfolio firms in performance oriented societies grow faster but at similar risk as their peers in non-performance oriented societies.