Welch, Kyle T., Private Equity's Diversification Illusion: Economic Comovement and Fair Value Reporting (January 14, 2014). Available at SSRN: http://ssrn.com/abstract=2379170 or http://dx.doi.org/10.2139/ssrn.2379170
"This study examines how accounting has informed private equity diversification claims and demand for private equity investments. Despite research showing private equity lacks portfolio diversification benefits, those marketing private equity assets continue to emphasize its diversification value, and demand for private equity investments has surged. Exploiting the change in international accounting, I show that returns provided by private equity firms understate the economic comovement between private equity and market returns, creating a diversification illusion. I find that private equity funds that adopted redefined fair value accounting reported returns with increased market beta and correlations. Additionally, I find that abnormal returns to private equity firms disappear after adopting fair value standards. In contrast to findings from public market research showing improved disclosure reduces the cost of capital, private equity firms that implement fair value standards encounter increased costs in accessing capital. This result is consistent with fair value reporting informing diversification benefits, improving resource allocation and mitigating agency concerns."
Keywords: Private Equity; IAS 39; FAS No. 157; Covariance Risk
Keywords: Disruption, Creative Destruction, Innovation
Many regions struggle to attract innovation activity. This column discusses new evidence suggesting that there is no universal ‘best’ policy. Policies focused exclusively on attracting ‘anchor tenants’ or cultivating new ventures may not be as effective as those promoting a mix of large and small firms. Regions with large firms but few young entrepreneurial firms may benefit from policies that cultivate new ventures, while those without large firms may benefit most from policies that attract some. read more on Vox
Keywords: Innovation, Entrepreneurial Activity, Entrepreneurship
Bozkaya, Ant and Kerr, William R., Labor Regulations and European Venture Capital (December 11, 2013). Bank of Finland Research Discussion Paper No. 30/2013. Available at SSRN: http://ssrn.com/abstract=2369281
"European nations substitute between employment protection regulations and labor market expenditures (e.g., unemployment insurance benefits) for providing worker insurance. Employment regulations more directly tax firms making frequent labor adjustments than other labor market insurance mechanisms. Venture capital investors are especially sensitive to these labor adjustment costs. Nations favoring labor market expenditures as the mechanism for providing worker insurance developed stronger venture capital markets over 1990-2008, especially in high volatility sectors. In this context, policy mechanisms are more important than the overall level of worker insurance." Source: SSRN
Keywords: Employment Protection Regulations, Unemployment Insurance Benefits, Private Equity, Venture Capital, Entrepreneurship
Home Depot, Anheuser Busch and soap giant Unilever may not seem like the kinds of companies that live on the cutting edge of technology. But they're among a fast-growing number of consumer brands that are setting up shop in the Bay Area with new venture capital funds and startup dens.
They come here to find better ways to develop products. They learn how to reach and read consumers in the brave new world of social media. And they also come with checkbooks ready: While corporate tech investing flagged in the wake of the dot-com bust -- from $20 billion a year in 2000 to less than $2 billion a decade later -- in recent years it's come back with a vengeance. Through the first nine months of this year, corporate VCs have collectively invested more than $5 billion, according to one recent estimate. read more in the San Jose Mercury News
Keywords: Entrepreneurship, Innovation, Start-ups, Silicon Valley, Technology, Marketing
"The conventional wisdom for investors in private equity funds is to invest in partnerships that have performed well in the past, so-called top quartile funds. This conventional wisdom is based on the belief that performance in private equity persists across funds for the same partnership. We present new evidence on the persistence of U.S. private equity (buyout and venture capital)
funds using a new research-quality dataset from Burgiss, sourced from over 200 institutional investors. Using detailed cash-flow data for funds, we study the persistence of buyout and venture capital fund performance of the same general partners across different funds. We pay particular attention to persistence pre- and post-2000. Previous research, studying largely pre-2000 data, has found strong persistence for both buyout and venture capital firms.
We confirm the previous findings on persistence in pre-2000 funds. There is significant persistence for buyout funds and, particularly for venture funds.
Post-2000, we find mixed evidence of persistence in buyout funds. When funds are sorted by the quartile of performance of their previous funds, performance of the current fund is statistically indistinguishable regardless of quartile. Returns for partnerships in all previous fund quartiles, including the bottom, exceed those of public markets as measured by the S&P 500. At the same time, however, regression estimates do find that current fund performance is significantly related to previous fund performance.
Post-2000, we find that performance in venture capital funds remains as statistically and economically persistent as pre-2000. Partnerships whose previous funds are below the median for their vintage year subsequently tend to be below median and have returns below those of the public markets (S&P 500). Partnerships in the top two quartiles tend to stay above the median and their returns exceed those of the public markets."
Keywords: Private Equity, Private Equity Performance, IRR
Keywords: Entrepreneurship, Mindset of Entrepreneurs
"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."
Keywords: Private Equity, Fund Return
Why it is important to look with methodology and persistence to look for the best tier or best quartile private equity funds:
Private-equity investors often enjoy superior returns. But what happens when you account for factors like illiquidity and high fees — both of which make it riskier to invest?
Three academics argue in a new National Bureau of Economic Research paper private equity is basically a wash for the average investor, once you price in the various risks — such as being locked in for years, or not being able to rebalance the portfolio as the years go by
“On average, LPs may just break even, net of management fees, carry, risk, and costs of illiquidity,” write Morten Sorensen of Columbia University, Jinqiang Yang of Shanghai University of Finance and Economics, and Neng Wang of Columbia Business School. “LP” is limited partner, which is the lingo for the high net-worth individuals and institutions who invest in private equity.
Here’s a look at the intuition: read the whole article in Barrons
Keywords: Private Equity, Private Equity Fund, Private Equity Performance
McCahery, Joseph A. and Vermeulen, Erik P. M., Recasting Private Equity Funds after the Financial Crisis: The End of 'Two and Twenty' and the Emergence of Co-Investment and Separate Account Arrangements (November 8, 2013). Lex Research Topics in Corporate Law & Economics Working Paper No. 2013-2. Available at SSRN: http://ssrn.com/abstract=2351816
"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."
Keywords: AIFMD, Carried Interest, Co-Investment Rights, Private Equity Fees
"We disaggregate the self-employed into incorporated and unincorporated to distinguish between “entrepreneurs” and other business owners. The incorporated self-employed have a distinct combination of cognitive, noncognitive, and family traits. Besides coming from higher-income families with better-educated mothers, the incorporated—as teenagers—scored higher on learning aptitude tests, had greater self-esteem, and engaged in more aggressive, illicit, risk-taking activities. The combination of “smarts” and “aggressive/illicit/risk-taking” tendencies as a youth accounts for both entry into entrepreneurship and the comparative earnings of entrepreneurs. In contrast to a large literature, we also find that entrepreneurs earn much more per hour than their salaried counterparts."
Keywords: Self-Employed, Entrepreneurs, Earnings
Fang, Lily H., Ivashina, Victoria and Lerner, Josh, The Disintermediation of Financial Markets: Direct Investing in Private Equity (August 2013). NBER Working Paper No. w19299. Available at SSRN: http://ssrn.com/abstract=2308268
"One of the important issues in corporate finance is the rationale for and role of financial intermediaries. In the private equity setting, institutional investors are increasingly eschewing intermediaries in favor of direct investments. To understand the trade-offs in this setting, we compile a proprietary dataset of direct investments from seven large institutional investors. We find that solo investments by institutions outperform co-investments and a wide range of benchmarks for traditional private equity partnership investments. The outperformance is driven by deals where informational problems are not too severe, such as more proximate transactions to the investor and later-stage deals, and by an ability to avoid the deleterious effects on returns often seen in periods with large inflows into the private equity market. The poor performance of co-investments, on the other hand, appears to result from fund managers’ selective offering of large deals to institutions for co-investing."
Keywords: Private Equity, Private Equity Intermediates
Harris, Robert S., Jenkinson, Tim, Kaplan, Steven N. and Stucke, Rüdiger, Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds (April 1, 2013). Available at SSRN: http://ssrn.com/abstract=2304808
"The conventional wisdom for investors in private equity funds is to invest in partnerships that have performed well in the past, so-called top quartile funds. This conventional wisdom is based on the belief that performance in private equity persists across funds for the same partnership. We present new evidence on the persistence of U.S. private equity (buyout and venture capital) funds using a new research-quality dataset from Burgiss, sourced from over 200 institutional investors. Using detailed cash-flow data for funds, we study the persistence of buyout and venture capital fund performance of the same general partners across different funds. We pay particular attention to persistence pre- and post-2000. Previous research, studying largely pre-2000 data, has found strong persistence for both buyout and venture capital firms.
We confirm the previous findings on persistence in pre-2000 funds. There is significant persistence for buyout funds and, particularly for venture funds.
Post-2000, we find mixed evidence of persistence in buyout funds. When funds are sorted by the quartile of performance of their previous funds, performance of the current fund is statistically indistinguishable regardless of quartile. Returns for partnerships in all previous fund quartiles, including the bottom, exceed those of public markets as measured by the S&P 500. At the same time, however, regression estimates do find that current fund performance is significantly related to previous fund performance.Post-2000, we find that performance in venture capital funds remains as statistically and economically persistent as pre-2000. Partnerships whose previous funds are below the median for their vintage year subsequently tend to be below median and have returns below those of the public markets (S&P 500). Partnerships in the top two quartiles tend to stay above the median and their returns exceed those of the public markets."
Keywords: Private Equity, Venture Capital
Good illustrations and reflections on private equity in the latest IESE Alumni Magazine. There could in dead be a private equity revival ahead.
Keywords: Private Equity, Buy Outs, LBO
None of the Internet giants have unionized employees, which has made Silicon Valley a favorite target for civil libertarians.
Earlier this month, after several prominent Bay Area technologists came out against the BART subway union strike, it provided a convenient excuse for haters to brand the tech community as greedy oligarchs. “There’s a reason why so many people are hating on the techies,” wrote Slate’s Andrew Leonard, after quoting one tech executive who wanted to automate BART employees out of existence — “Get ‘em back to work, pay them whatever they want, and then figure out how to automate their jobs so this doesn’t happen again.”
There’s a very good reason why unions have never had a presence in Silicon Valley: they aren’t fans of technology. Labor unions have aggressively fought Uber and Lyft, which threaten taxi drivers with increased competition. They’ve effectively paralyzed a multi-billion-dollar sharing economy industry from spreading around the country. read more on TechCrunch
Keywords: Technology, Productivity, Technological Progress, Labor Unions
Zeisberger, Claudia, Prahl, Michael and Wee, Jean, Private Equity and Family Businesses - Making the Partnership Work (July 18, 2013). INSEAD Working Paper No. 2013/81/DS/EFE. Available at SSRN: http://ssrn.com/abstract=2295314
"Fast growing Family Businesses have many choices when considering the sources of funding to expand their business. The article discusses a systematic approach to exploring a potential partnership between Growth Equity Investors and Family Owned Businesses. It describes under which circumstances Growth Equity can significantly contribute to the development of the family firm and contemplates the main issues to consider before entering into such a long term partnership. As such it acts as a valuable checklist for entrepreneurs and business owners to make better informed decisions when selecting a Growth equity or Private Equity investor to facilitate future growth."
Keywords: Private Equity, Family Firms
Cambridge Associates: U.S. Private Equity and Venture Capital Funds Outpaced Public Equities in the Final Quarter of 2012. Both Alternative Asset Classes Turned in Solid 12-month Performances, According to Cambridge Associates, Boston, July 9, 2013
"In a fourth quarter fraught with political uncertainties, including the “fiscal cliff” negotiations, and other macroeconomic factors affecting the public markets, U.S. private equity and venture capital funds both generated positive returns for their investors and outperformed public equities, which were largely negative for the quarter. Continuing on momentum from a strong finish in 2011, both private asset classes also posted solid results for the calendar year, according to Cambridge Associates.
The Cambridge Associates LLC U.S. Private Equity Index® earned 3.5% for the quarter ending December 31, 2012, and 13.8% for the year ending on the same date. The Cambridge Associates LLC U.S. Venture Capital Index® returned 1.2% for the quarter and 7.2% for the year. The indices are derived from performance data compiled for funds that represent the majority of institutional capital raised by U.S.-based partnerships for their respective asset classes (private equity and venture capital, respectively). The following tabledetails the performance of the Cambridge benchmarks against several key market indices. Returns for periods of one year and longer are annualized." read more at Cambridge Associates
Keywords: Private Equity, Venture Capital
"Coursera offers courses from the top universities, "for free to everyone". Current partners include Princeton University, Stanford University, University of California, Berkeley, University of Michigan-Ann Arbor, and University of Pennsylvania. The platform is designed to support millions of students on degree level units usually lasting 5 to 10 weeks."
Keywords: Online Education, Scaling up education
Online learning an effective way? NBER research says that it depends on the level of the student:
Online education, a way for schools to survive?
Schrag, Philip G. , MOOCs and Legal Education: Valuable Innovation or Looming Disaster? (June 10, 2013). Georgetown Public Law Research Paper No. 13-055. Available at SSRN: http://ssrn.com/abstract=2278261 or http://dx.doi.org/10.2139/ssrn.2278261
Selected blogs on online learning:
"This study examines the growth in private equity backed portfolio companies in the UK over the period from 1995 to 2012 using a dataset selected from the population of private and public companies in the UK including companies that received private equity backing. On the basis of real cumulative average growth rates (CAGR rolling 3 and 5 year periods), we find a consistent pattern of PE backed buyouts showing higher growth rates than non-PE backed buyouts for the first four years post buyout. Strongest increases in initial growth are displayed in respect of equity, total assets and value added. The growth rate remains positive throughout the post-buyout period for all variables except for sales and employment that become negative in year 7 post buyout. For the sub-period 2008-2011, PE backed buyouts are significant and positively associated with growth in all variables for both CAGR3 and 5 year periods, suggesting the PE backed firms’ growth has held up better than non-PE backed private companies. Board size is consistently significant and positively associated with all measures of growth, with significant and negative relationships between average director age and number of multiple directorships and all growth measures. Controlling for other factors, the extent of UK experience of PE firms is significant and positively associated with growth in value added, assets, sales, equity and employment. Foreign PE firms are significant and positively associated with growth in asset and equity but significant and negatively associated with employment growth." Source: SSRN
Keywords: LBOs, Firm Growth
"Technology tends to run in cycles. Microsoft ruled the 90’s by building essential software for enterprises. Then Apple created a new device driven marketplace in which the consumer was king. What will drive the next decade?
While these things are always hard to predict with any specificity, much of the writing is already on the wall. Humanlike, no-touch interfaces will combine with a pervasive array of sensors and intelligent back-end systems to form a new Web of Things. Computing will become truly ubiquitous.
This new era of computing will be different than anything we’ve seen before. Technology will cease to be something we turn on and off, but will become an inextricable part of not only our environment, but ourselves. It is a future that is both utopian and dystopian (depending on your perspective), in that the human experience will change dramatically." read more on Business Insider
Keywords: Technology, Technological Trends
PRIVATE EQUITY DEMYSTIFIED, An explanatory guide, John Gilligan and Mike Wright _________________________________________________________________________________
PRIVATE EQUITY NEWS:
FOUNDER HIGHLIGHTS AND FOUNDER FRUSTRA- TIONS:
PRIVATE EQUITY STATISTICS:
WORKING PAPERS PRIVATE EQUITY AND VENTURE CAPITAL:
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