Private Equity Research Articles

Arbitral Settlement of Joint Infringement by Private Equity Funds

Based on the confidentiality and efficiency of arbitration, the dispute resolution method is often agreed as arbitration in the contracts involving private equity funds. The investment process of private equity funds often involves multi-layer nesting to avoid regulation and infringement of investors' rights and interests. Such infringement cases involve joint infringement by a majority of people, and it is difficult for investors to claim their rights through infringement lawsuits based on the exclusionary effect of a valid arbitration agreement on jurisdiction in the event that investors have signed a valid arbitration agreement. Due to the relativity of the arbitration agreement, the arbitral tribunal cannot break through the validity of the arbitration agreement to pursue the liability of other joint infringers when accepting the relevant case, and cannot resolve the dispute at once. If the validity of the arbitration agreement can be extended to other joint tortfeasors in the private equity fund, it will not only facilitate the investors to claim their rights and interests, but also improve the efficiency of dispute resolution.

The Coming of Age of Venture Capital Investing in the New Fields of the Emerging MOGI Sectors: A Snapshot for the Future: Part 2

Venture Capital (VC) has become a chosen tool of investment in the areas of business where there seems to be potent promise but yet immature in terms of market, customer acceptance and political dynamics. Such uncertainties make bankers both nervous and hesitant,and where the risk takers like venture capitals thrive. In the first part of the article we discussed about how mineral,oil& gas and energy companies are becoming both investors of VC and attractive destinations for investment by other VCs. The VCs are mostly either Private Equities (PE) or the venture funds of established companies. They mostly invest in emerging technologies and risky, yet promising, opportunities. In this part we discuss how the risks are assessed and mitigated, what takes one to be the VC fund manager and the current dynamics in the VC investments. Risky as they are, VC investors always look for reasonable profit to exit investments, for the next set of investors to pursue the opportunities with the omnipresent risks.

Industrial Policy Environment and Private Equity Placement: Evidence from Chinese Real Estate Firms

Over the past four decades, China’s real estate industry has experienced rapid growth, accompanied by frequent regulatory interventions. These shifts present an ideal context for examining the characteristics of private equity placements (PEPs) under varying industrial policy environments. This study examines the PEPs of Chinese real estate firms from 2006 to 2023, calculating the cumulative abnormal returns during announcement periods and the transaction discounts across various regulatory phases. The analysis reveals significant positive announcement effects, even in times of policy tightening, with these effects becoming more pronounced during periods of policy relaxation. However, regression analyses suggest that the policy environment does not significantly impact the announcement effects. Contrary to traditional views, PEP discounts tend to be shallower during policy tightening and deeper during policy loosening. Further analysis indicates that investors are willing to accept smaller discounts in exchange for more valuable investment opportunities.

Does the disclosure of ESG information by private equity firms impact the success of their fundraising efforts?

This study examines the impact of private equity fund managers' (GPs') ESG disclosure on fundraising. To this end, a sample of global private equity and venture capital funds that completed fundraising between 2020 and 2022 is employed. Our findings indicate that an increase in ESG disclosure by GPs is associated with an increase in fundraising. This indicates that GPs' ESG disclosure diminishes information asymmetry and has a favorable impact on fundraising. Conversely, the level of ESG disclosure among limited partners (LPs) has no significant impact on the relationship between GPs' ESG disclosure level and fundraising. The findings of this study have significant implications for private equity stakeholders, including GPs, given the current context of declining investment demand due to rising interest rates, recessionary concerns, poor performance and tighter regulations on private equity management. In this environment, ESG disclosure is becoming increasingly challenging for private equity firms to utilize as a fundraising strategy.

Latin America: Weak academic freedom within strong university autonomy

Abstract In Latin America, the notions of academic freedom or the freedom of science have not had the overarching influence in defining the prerogatives of scholars and the university that we see them exerting over the experiences of Western Europe and the Anglosphere. The governing notion, from whence all other freedoms emerge, is that of university autonomy. In Latin America, university autonomy evolved over the twentieth century as a protection of the university against the encroachment of governments – often authoritarian or outright dictatorial – so they could carry out their missions as they defined them. In Latin America, the locus of what in Europe is understood as scientific freedom is vested in the universities, not in the professoriate. It is assumed that free universities will foster an environment of academic freedom within. The contemporary contestations of university autonomy in Latin America fit squarely into the liberal script, as they seek to make universities more responsive to policy goals in the areas of higher education quality and accountability, efficiency and productivity, expansion of public or private provision, access and equity. Often, universities and their associations have raised autonomy as an objection to these policy agendas.

Risk-Adjusted Returns of Private Equity Funds: A New Approach

Abstract This paper introduces a new metric, α, to benchmark the performance of individual private equity funds. Our metric is substantially less sensitive to noise in fund cash flows compared to the popular public market equivalent (PME) and its generalization (GPME), while having the same aggregate pricing implications as GPME. For a large data set of fund cash flows, α estimates have much lower standard deviation across funds than does (G)PME. For buyout funds, PME and α are close, but deviate in certain subsamples. Using α increases power in regressions involving fund performance and improves performance predictability of future funds. (JEL C58, G12, G23, G24)

Transformative Dynamics in Private Equity: Exploring Co-investment, ESG Integration and Digitalization Strategies

This paper delves into the evolving landscape of private equity (PE) financing, particularly in the context of the real estate and project development sectors amidst global economic fluctuations and geopolitical uncertainties. With traditional debt financing losing its sheen, the study focuses on the burgeoning role of PE, especially co-investment funds, as a viable financial alternative. Utilizing a rich dataset from reputable sources such as Morningstar, Pitchbook, and the European Central Bank, along with other pertinent studies, the paper presents a nuanced analysis of the declining PE transaction activity in 2023. It highlights how this downturn has catalyzed the adoption of innovative strategies, including the rise of “continuation vehicles” and the increasing significance of co-investments. Moreover, the research offers an insightful examination of the German SME sector, showcasing how PE can be a transformative force. It particularly emphasizes the incorporation of ESG (environmental, social, and governance) considerations and the advancement of digitalization within these enterprises. The study employs a mixed-methods approach, blending qualitative insights with a robust collection of both primary and secondary data. It argues that PE is not merely a financial instrument but a catalyst for meaningful business evolution, enabling German SMEs to effectively respond to current market challenges and undergo essential transformations. This paper aims to contribute to the broader understanding of PE’s role in contemporary business environments, offering valuable perspectives for academics, industry practitioners, and policymakers.

Assessing Private Equity Involvement in Ophthalmology: Parallels with the Past, Concerns for the Future

PurposeTo discuss the history and current state of private equity in ophthalmology and explore potential implications for ophthalmology practices, physicians, and patients. DesignPerspective. MethodsReview of selected articles in ophthalmology and non-ophthalmology medical literature and commentary based on the authors’ experiences. ResultsInvestment in ophthalmology appeals to private equity firms because of high procedural volumes, fragmented private practices, opportunities for real estate ownership, and an aging population in need of eye care. As a result, acquisition of private practices by large private equity companies has swelled since 2015. Metropolitan areas and practices that possess ambulatory surgical centers or a high proportion of retina surgeons receive the greatest investment. However, little objective data exists regarding the benefits of this trend. Initial research suggests that private equity ownership may negatively impact patient care through greater costs, shorter appointments, and fewer Medicare/Medicaid patients seen. Skeptics of private equity also highlight concerns that include financial risk falling primarily on the acquired practice itself, a short-term business approach that rewards profit maximization, and the erosion of physician autonomy. Furthermore, young ophthalmologists express reservations about working for private equity firms. 78% of trainees indicated they would not consider employment by a private equity owned practice and 81.4% of vitreoretinal fellows voiced concerns about autonomy and job security. Proposed legislation aimed at limiting private equity acquisitions is currently under review at the statewide level, adding additional uncertainty to the future of private equity involvement in ophthalmology. ConclusionAlthough investment by private equity offers potential financial rewards and operational improvements for practices, it also raises significant concerns reminiscent of those experienced by physician practice management companies in the 1990s. Nonanecdotal data is needed to assess the benefits and future of private equity involvement in ophthalmology.

Financing green innovation startups: a systematic literature review on early-stage SME funding

ABSTRACT This paper investigates the critical issue of financing early-stage green startups, examining the types of investors and finance models available, the challenges these startups face, and how the green finance ecosystem can better support early-stage investment. Utilizing a systematic literature review (SLR) methodology, we provide a comprehensive analysis of the current landscape. Our findings reveal a significant paucity of data and a bias towards well-established North American and European ecosystems, while highlighting an emerging diversity in private finance sources post-Global financial crisis (GFC), including grants, equity, and crowdfunding. Despite this, there remains a heavy reliance on public funding and a lack of evidence regarding its impact. The inherent characteristics of cleantech – high capital expenditure, long investment horizons, and disruptive nature – necessitate innovative public financing instruments and policies to reduce risk and attract private investment. Our theoretical contribution highlights the necessity for interdisciplinary research and policy collaboration to develop a holistic entrepreneurial finance (entfin) ecosystem. This approach should integrate quantitative economic and qualitative behavioural finance research to address information asymmetries and improve the green economy policy mix. Such a framework will support public-private co-financing, enhance stakeholder engagement, and provide evidence for policy decisions, facilitating more rapid commercialization of cleantech innovations for environmental sustainability.

The sectoral consequences of private equity acquisitions: Spillovers in wages and employment

The sectoral consequences of private equity acquisitions: Spillovers in wages and employment

Health in the age of asset manager capitalism.

A relatively small number of for-profit asset managers-financial intermediaries that invest capital on behalf of other investors-have emerged in recent decades to become some of the most influential commercial actors in the global political economy. Despite their important role in society, asset managers have received little attention from a public health perspective. In this article, we aimed to propose a conceptual framework of potential pathways and mechanisms through which asset managers may influence health and equity. The framework included asset class-specific pathways related to investments in publicly listed corporate equity, private equity, 'real assets' (e.g. housing, hospitals, farmland) and commodities. The framework also included more generalized pathways, focusing on ways in which the large and highly concentrated asset management sector can drive economic inequities, influence policy and political decision-making and shape the global 'development' agenda. We argue that measures challenging so-called 'asset manager capitalism', such as promoting and protecting the public ownership of companies and assets in essential sectors, are imperative to address the commercial determinants of ill health and inequity.

Machine learning private equity returns

In this paper, we use two machine learning techniques to learn the aggregated return time series of complete private capital fund segments. First, we propose Stochastic Discount Factor (SDF) model combination to determine the public factor exposure of private equity. Here, we describe our theoretical motivation to favor model combination over model selection. This entails that we apply simple coefficient averaging to obtain multivariate SDF models that mimic the factor exposure of all major private capital fund types. As a second step, we suggest componentwise L2 boosting to estimate the error-term time series associated with our factor models. The simple addition of the public factor model returns and the error terms then yields the total return time series. These return time series can be applied for proper integrated public and private risk management or benchmarking.

Connectedness and systemic risk between FinTech and traditional financial stocks: Implications for portfolio diversification

The rapid growth in FinTech is attracting significant investor attention. There are concerns that FinTech stocks may be a source of systemic risk and this has implications for the stability of the financial sector. This study uses a TVP-VAR model to estimate the dynamic connectedness between global FinTech stocks and the stocks of large US banks, regional US banks, US insurance, and global private equity. The findings reveal that FinTech and insurance stocks are net receivers of shocks while large US banks are a major source of shocks. Thus, FinTech stocks are not a source of systemic risk but can be affected by financial contagion and systemic risk originating from large US banks. The highest connectedness was observed at the onset of the COVID-19 lockdowns illustrating the dramatic impact that a health pandemic can have on systemic risk. Systemic risk also increased during the 2023 US bank panic. Connectedness has implications for constructing investment portfolios. The equally weighted, risk parity, and risk parity connectedness portfolios have similar portfolio summary statistics, but lower risk adjusted returns than the maximum Sharpe ratio portfolio which better captures the low correlation between FinTech stocks and traditional financial stocks. These results are robust across various portfolio rebalancing periods (daily, weekly, monthly).

How Private Equity Funds can Spur New Investment in the Global SAM and MOGI Sectors (Part-2)

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Charity begins at the office: issuing cheap stock and stock options to employees and insiders before going public

PurposePress reports have indicated that firms frequently underprice restricted stock and employee stock options. I test for underpricing of stock and options.Design/methodology/approachI examined a sample of 5,333 private firm stock and option issuances between 1985 and 2017. I tested for underpricing using two approaches: assuming investors have no special market-timing ability and assuming instead they have perfect market-timing ability.FindingsI find evidence of widespread stock and option underpricing by private firms before they go public reflecting large discounts that exceed reasonable compensation for lack of marketability. Unreported underpricing is more frequent in the last pre-IPO private equity transactions that offer the last opportunity to give such discounts before the stock is publicly traded, but the discounts are greater in the earlier pre-IPO transactions where unreported discounts are presumably tougher for the SEC to detect. Underpricing is still detected even when the actual DLOMs are tested against a benchmark that assumes investors have perfect market-timing ability.Research limitations/implicationsFirms frequently underprice restricted stock and employee stock options. Firms tend to underprice stock options more frequently than restricted stock, but restricted stock tends to be priced at deeper discounts when recipients are assumed not to have any special market-timing ability.Practical implicationsPrivate firms issue restricted stock and options as incentive compensation. Lowballing the valuation transfers wealth from outside stockholders to employees/insiders. Wealth transfers take place through the issuance of equity claims to employees/insiders before firms go public. I found that more than a quarter of the DLOMs exceed the theoretical maximum by, on average, between 16% (median) and 20% (mean). This finding raises two questions worthy of investigation. First, to what extent do the frequency and magnitude of DLOMs above the theoretical maximum depend on whether a board of directors obtains an independent appraisal of a stock’s fair market value? Second, if DLOMs above the theoretical maximum are observed even when the stock is independently appraised, how do appraisers justify such large DLOMs?Social implicationsThe wealth transfers that take place through the issuance of equity claims to employees/insiders before firms go public benefit employees/insiders at the expense of outside shareholders.Originality/valueMy paper is the first to furnish evidence of widespread stock and option underpricing by private firms before they go public; demonstrate that the unreported underpricing is more frequent in the last pre-IPO private equity transactions that offer the last opportunity to give such discounts before the stock is publicly traded and show that the discounts are greater in the earlier pre-IPO transactions where unreported discounts are presumably tougher for the SEC to detect.

Shariah Contracts in Private Equity and Its Prospect for Small and Medium Enterprises (SME)

This study explores the significance of contracts in private equity applications, particularly in addressing Shariah compliance concerns inherent in traditional private equity structures. Private equity plays a crucial role in funding and nurturing SMEs, aligning with equity-based activities that are conducive to Islamic finance principles. Using a qualitative Grounded Theory approach, the study involves interviews with various stakeholders in the financial industry. Grounded theory is an iterative and inductive method that systematically analyses data to uncover patterns and themes, generating hypotheses or theories derived directly from the data. The study identifies murabahah, ijarah, mudarabah, and musharakah as suitable contracts for private equity applications. These findings illuminate opportunities for financial industry participants, particularly SMEs, to innovate and access funding through private equity avenues.

Urban Agriculture and Food Security in Development Planning

With the world population anticipated to reach over nine billion in 2050, and the majority of whom will live in cities, feeding a predominantly urban population will pose additional challenges to a predominantly rural-based agrifood system. Further, with the focus of economic activity being centered in cities, a development question is whether agriculture in cities should be an integral part of national planning. This is particularly when food insecurity is expected to challenge the poor in cities much more than in the countryside. Urban and peri-urban agriculture has been practiced in many parts of the world through activities ranging from community gardens to commercial farms of varying sizes. A major change, accelerated by supply chain disruptions and the COVID-19 pandemic in the early 2020s, has been the rapid development of technologies (digital, physical, biotechnological) that increases food production capabilities in urban areas and provide economic opportunity for entrepreneurship. Additionally, sizable investments from private equity have seen sophisticated food production facilities, such as indoor vertical vegetable and fish farms and precision fermentation factories, produce novel food such as alternative proteins in city spaces. Apart from the economic and food security benefits arising from urban agriculture, environmental and social benefits have also been demonstrated in cities that have adopted a clear mandate to become “green” and reduce their carbon footprints. This paper provides a background on urban farming, its justification as a worthwhile activity, and the rationale for explicitly including urban agriculture in national planning.

Editorial Comment on “Effect of Private Equity Ownership on Access to Outpatient Urologic Cancer Care in Medicare Recipients”

Editorial Comment on “Effect of Private Equity Ownership on Access to Outpatient Urologic Cancer Care in Medicare Recipients”

Private Equity Acquisition of Physician Practices—Looking for Ethical Guidance From Professional Societies

Private Equity Acquisition of Physician Practices—Looking for Ethical Guidance From Professional Societies

Pathways to success: a machine learning approach to predicting investor dynamics in equity and lending crowdfunding campaigns

AbstractCrowdfunding has evolved into a formidable mechanism for collective financing, challenging traditional funding sources such as bank loans, venture capital, and private equity with its global reach and versatile applications across various sectors. This paper explores the complex dynamics of crowdfunding platforms, particularly focusing on investor behaviour and investment patterns within equity and lending campaigns in Italy. By leveraging advanced machine learning techniques, including XGBoost and LSTM networks, we develop predictive models that dynamically analyze real-time and historical data to accurately forecast the success or failure of crowdfunding campaigns. To address the existing gaps in crowdfunding analysis tools, we introduce two novel datasets—one for equity crowdfunding and another for lending. Moreover, our approach extends beyond traditional binary success metrics, proposing novel measures. The insights gained from this study could support crowdfunding strategies, significantly improving project selection and promotional tactics on platforms. By enhancing decision-making processes and providing forward-looking guidance to investors, our computational model aims to empower both campaign creators and platform administrators, ultimately improving the overall efficacy and sustainability of crowdfunding as a financing tool.