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Working Papers on Private Equity Topics

Fund Performance

Fees/Compensation

Economic Impact

Financial Institutions

Other


Fund Performance

The Performance of Private Equity Funds Phalippou, Ludovic, and Oliver Gottschalg. 2009. The Review of Financial Studies 22, (4). Full paper here

Shows that the sample of mature private equity funds used in previous research and as an industry benchmark is biased towards better performing funds. They also show that accounting values reported by these mature funds for non-exited investments are substantial and mostly represent living-dead investments. After correcting for sample bias and overstated account values, average fund performance actually changes to underperformance. This shows that growth in amount allocated to this asset class cannot be attributed to high past performance, and several potentially misleading aspects of standard performance reporting are discussed.

Corporate Governance and Value Creation: Evidence from Private Equity Acharya, Viral V., Oliver F. Gottschalg, Moritz Hahn, and Conor Kehoe. 2013. Review of Financial Studies 26 (2): 368-402. Full paper here

Using deal-level data from transactions initiated by large private equity houses, we find that the abnormal performance of deals is positive on average, after controlling for leverage and sector returns. Higher abnormal performance is related to improvement in sales and operating margin during the private phase, relative to that for quoted peers. General partners who are ex-consultants or ex–industry managers are associated with outperforming deals focused on internal value-creation programs, and ex-bankers or ex-accountants with outperforming deals involving significant mergers and acquisitions. The findings suggest the presence, on average, of positive but heterogeneous skills at the deal-partner level in large private equity transactions.

Alternative Investments: Instruments, Performance, Benchmarks, and Strategies. Baker H. K., and Greg Filbeck. 2013. Hoboken, New Jersey: John Wiley & Sons, Inc. Full paper here

Alternative investments are defined as asset classes that fall outside of traditional investments, such as stocks, bonds, and cash. Real estate, private equity, commodities, managed futures, hedge funds, and distressed securities are all examples of alternative investments. Although the characteristics of each of these assets differ from the others, all tend to share the ability to offer diversification for a traditional portfolio through enhanced returns, reduced risk, and/or improved risk-adjusted performance. Yet, because of relative illiquidity, complexity, or minimum investment requirements, alternatives are often unsuitable or are beyond the reach of some investors. This chapter offers an overview to alternative investments and to the remaining 27 chapters. These chapters provide theoretical and empirical evidence about the usefulness of these assets in the portfolio management process.

Fees/Compensation

Do Funds-of-Funds Deserve their Fees-on-Fees? Ang, Andrew, Matthew Rhodes-Kropf, and Rui Zhao. 2008. National Bureau of Economic Research.     Full paper here

Since the after-fee returns of funds-of-funds are, on average, lower than hedge fund returns, it is easy to conclude that funds-of-funds do not add value compared to hedge funds. However, funds-of-funds should not be evaluated relative to hedge fund returns in publicly reported databases. Instead, the correct fund-of-funds benchmark is the set of direct hedge fund investments an investor could achieve on her own without recourse to funds-of-funds. We use asset allocation concepts to estimate characteristics of the fund-of-funds benchmark distribution. Since the benchmark characteristics are reasonable, we conclude that funds-of-funds, on average, deserve their fees-on-fees.

Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts Axelson, Ulf, Tim Jenkinson, Per Strömberg, and Michael S. Weisbach. 2013b.The Journal of Finance 68 (6): 2223-67.     Full paper here

Private equity sponsors pay special attention to designing capital structure, making buyouts an interesting setting for examining capital structure theories. In a detailed international sample of buyouts, we find that buyout leverage is unrelated to factors that drive public firm leverage, such as industry factors and other cross-sectional characteristics, contrary to what standard capital structure theories suggest. Instead, variation in economy-wide credit conditions is the main driver of leverage and pricing in buyouts, while having little impact on public firms. Higher deal leverage is associated with lower buyout fund returns, suggesting that acquirers overpay when access to credit is easier.

Economic Impact

Private Equity and Employment Davis, Steven J, John Haltiwanger, Ron Jarmin, Josh Lerner, and Javier Miranda. 2011. CES 08-07R.     Full paper here

They investigate the claim that leveraged buyouts bring huge job losses by analyzing U.S. private equity transactions from 1980 to 2005. They find that, relative to controls for industry, size, age, and prior growth, employment at target establishments does decline post buyout. However, they then show that private equity buyouts catalyze the creative destruction process in the labor market, with only a modest net impact on employment. This creative destruction response mainly involves more rapid reallocation of jobs across establishments, so the sum of gross job creation and destruction at target firms exceeds that of control firms.

Financial Institutions

Why Do Firms Use Private Equity to Opt Out of Public Markets? Dittmar, Amy K. and Sreedhar T Bharath. 2009. Review of Financial Studies 23(5).    Full paper here

This paper investigates how firms weigh costs and benefits of being public in the decision to go private. They employ a comprehensive sample of going private transactions from 1980-2004 in the U.S. and examine how these firms differ, from IPO to going private, relative to a sample of firms that went and remained public. Our results provide strong support for the importance of information and liquidity considerations in being a public firm, as well as access to capital and control considerations in the choice of going private.

Why Do Managements Practices Differ across Firms and Countries? Bloom, Nicholas, and John Van Reenen. 2010.The Journal of Economic Perspectives: 203-24. Full paper here

Economists have long puzzled over the astounding differences in productivity between firms and countries. In this paper, we present evidence on a possible explanation for persistent differences in productivity at the firm and the national level -- namely, that such differences largely reflect variations in management practices. We have, over the last decade, undertaken a large survey research program to systematically measure management practices across firms, industries, and countries. Our survey approach focuses on aspects of management like systematic performance monitoring, setting appropriate targets, and providing incentives for good performance. We explain how we measure management; identify some basic patterns in our data; then turn to the question of why management practices vary so much across firms and nations. What we find is a combination of imperfectly competitive markets, family ownership of firms, regulations restricting management practices, and informational barriers allow bad management to persist.

Other

More Insiders, More Insider Trading: Evidence from Private-Equity Buyouts Acharya, Viral V., Timothy C. Johnson. 2010. Journal of Financial Economics.    Full paper here

In this paper, they relate indicators of insider trading activity to the number of financing participants. They find that the larger the equity syndicate, the more likely there is to be suspicious trading on the stock-market as the number of equity participants increases, and that there is likely to be more suspicious activity on the credit market as the number of debt syndicate members increase.



 
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