Pub Date : 2015-08-31DOI: 10.3905/jpe.2015.18.4.046
B. Puche, Christophe Lotz
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.
{"title":"Private Equity Minority Investments","authors":"B. Puche, Christophe Lotz","doi":"10.3905/jpe.2015.18.4.046","DOIUrl":"https://doi.org/10.3905/jpe.2015.18.4.046","url":null,"abstract":"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.","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-08-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122710498","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-08-31DOI: 10.3905/jpe.2015.18.4.019
H. Gray, Chad Greenway, R. Feeney
The business world teems with myriad opinions regarding the best way to manage salespeople; yet, investors and managers essentially agree that individual agendas are impossible to eliminate in the world of sales management. Often salespeople conduct their business segregated from the core management team, which may result in a focus on accomplishing individual goals rather than on making the company successful. These situations may drive near-term gains but almost always lead to longer-term profit margin erosion. One of the primary culprits for such misalignment is the sales commissions program, which is likely to undermine any sense of unity and common purpose in a business.
{"title":"Portfolio Company Best Practices—Give Salespeople Free Range, but Establish an Outer Perimeter","authors":"H. Gray, Chad Greenway, R. Feeney","doi":"10.3905/jpe.2015.18.4.019","DOIUrl":"https://doi.org/10.3905/jpe.2015.18.4.019","url":null,"abstract":"The business world teems with myriad opinions regarding the best way to manage salespeople; yet, investors and managers essentially agree that individual agendas are impossible to eliminate in the world of sales management. Often salespeople conduct their business segregated from the core management team, which may result in a focus on accomplishing individual goals rather than on making the company successful. These situations may drive near-term gains but almost always lead to longer-term profit margin erosion. One of the primary culprits for such misalignment is the sales commissions program, which is likely to undermine any sense of unity and common purpose in a business.","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"196 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-08-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124365495","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-06-16DOI: 10.3905/jpe.2015.18.4.008
Luis E. Pereiro
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.
{"title":"The Opportunity Cost of Venture Capital","authors":"Luis E. Pereiro","doi":"10.3905/jpe.2015.18.4.008","DOIUrl":"https://doi.org/10.3905/jpe.2015.18.4.008","url":null,"abstract":"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.","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-06-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123602826","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-05-31DOI: 10.3905/jpe.2015.18.3.079
Eymen Errais, S. B. Miled
After the Tunisian revolution, people were hit by the bitter reality of the Tunisian miracle of Ben Ali’s regime: an unemployment rate of 20% (INS [2013]) and a poverty rate reaching 25%. With no access to loans, low-income people find themselves in a vicious circle of poverty that will lead them to either begging or criminality. Many of the country’s poor people carry heavy life baggage; the stories of their personal life lives could have been ripped from the pages of Les Misérables. Such realities pushed the government to make draconian changes leading to more liberalization of the microfinance sector, in an attempt to alleviate poverty and enhance social inclusion. Among the new players allowed into the market are private equity (PE) firms. The decision to allow PE participation caught the industry by surprise, since the Tunisian microfinance sector had always been restricted to nonprofit associations, far from the reach of PE firms. The change gave rise to numerous questions: Why would a private equity firm invest in the micro-finance sector? Why now? Is the sector profitable? Is it competitive? What is the investment strategy?
{"title":"Investing in Microfinance: The Case of Tunisia","authors":"Eymen Errais, S. B. Miled","doi":"10.3905/jpe.2015.18.3.079","DOIUrl":"https://doi.org/10.3905/jpe.2015.18.3.079","url":null,"abstract":"After the Tunisian revolution, people were hit by the bitter reality of the Tunisian miracle of Ben Ali’s regime: an unemployment rate of 20% (INS [2013]) and a poverty rate reaching 25%. With no access to loans, low-income people find themselves in a vicious circle of poverty that will lead them to either begging or criminality. Many of the country’s poor people carry heavy life baggage; the stories of their personal life lives could have been ripped from the pages of Les Misérables. Such realities pushed the government to make draconian changes leading to more liberalization of the microfinance sector, in an attempt to alleviate poverty and enhance social inclusion. Among the new players allowed into the market are private equity (PE) firms. The decision to allow PE participation caught the industry by surprise, since the Tunisian microfinance sector had always been restricted to nonprofit associations, far from the reach of PE firms. The change gave rise to numerous questions: Why would a private equity firm invest in the micro-finance sector? Why now? Is the sector profitable? Is it competitive? What is the investment strategy?","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130613120","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-05-31DOI: 10.3905/jpe.2015.18.3.055
M.B. Raghupathy, A. Thillairajan
As financial investors in portfolio companies, venture capital (VC) firms are expected to add value through continuous monitoring and sustained involvement. Such an effort is expected to give VC-backed IPO firms (VC IPOs) an edge over those IPO firms not backed by VCs. We examine such value additions use a comparative analysis of operating and stock performance data of VC IPOs against three groups of non-VC POs. We identified a set of 92 VC IPOs and 182 non VC IPOs. The 182 non-VC IPOs were further subdivided into industry and size groups. While Wilcoxon tests were used to compare the medians of operating and stock performance, panel data regression models were used to establish the impact of VC on those differential performances. We find that the medians of VC IPOs on most operating performance parameters are better than non-VC IPO groups. But the relational tests could not attribute the better performance to VC influence. We conclude that this could be indicative of VCs’ superior ability to identify promising ventures and push them toward their maximum potential. This study is one of the pioneering efforts in exploring VC value creation in the Indian context. We also extend the capital market research in accounting to a VC context.
{"title":"Financial Value Creation: A Comparative Study of VC-Backed IPOs and Non-VC-Backed IPOs in India","authors":"M.B. Raghupathy, A. Thillairajan","doi":"10.3905/jpe.2015.18.3.055","DOIUrl":"https://doi.org/10.3905/jpe.2015.18.3.055","url":null,"abstract":"As financial investors in portfolio companies, venture capital (VC) firms are expected to add value through continuous monitoring and sustained involvement. Such an effort is expected to give VC-backed IPO firms (VC IPOs) an edge over those IPO firms not backed by VCs. We examine such value additions use a comparative analysis of operating and stock performance data of VC IPOs against three groups of non-VC POs. We identified a set of 92 VC IPOs and 182 non VC IPOs. The 182 non-VC IPOs were further subdivided into industry and size groups. While Wilcoxon tests were used to compare the medians of operating and stock performance, panel data regression models were used to establish the impact of VC on those differential performances. We find that the medians of VC IPOs on most operating performance parameters are better than non-VC IPO groups. But the relational tests could not attribute the better performance to VC influence. We conclude that this could be indicative of VCs’ superior ability to identify promising ventures and push them toward their maximum potential. This study is one of the pioneering efforts in exploring VC value creation in the Indian context. We also extend the capital market research in accounting to a VC context.","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"92 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132774591","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-05-31DOI: 10.3905/jpe.2015.18.3.072
R. Dhankar, Kunjana Malik
This article focuses on the performance of one of the top sectors of private equity investment in India, the banking and financial services (BFSI) sector. We study the majority of PE investments in the BSFI sector, using a logistic regression approach to examine the effect of PE on total assets, return on assets, return on capital employed, growth in profit after tax, asset growth, ratio of debt to total assets, and ratio of equity to total assets.
{"title":"The Effect of Private Equity on the BFSI Sector in India: A Logistic Panel Data Analysis","authors":"R. Dhankar, Kunjana Malik","doi":"10.3905/jpe.2015.18.3.072","DOIUrl":"https://doi.org/10.3905/jpe.2015.18.3.072","url":null,"abstract":"This article focuses on the performance of one of the top sectors of private equity investment in India, the banking and financial services (BFSI) sector. We study the majority of PE investments in the BSFI sector, using a logistic regression approach to examine the effect of PE on total assets, return on assets, return on capital employed, growth in profit after tax, asset growth, ratio of debt to total assets, and ratio of equity to total assets.","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"27 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125957447","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-05-31DOI: 10.3905/jpe.2015.18.3.021
S. Morrissette, Shamus Hines
The predominance of search fund research is focused on the mechanics of selection or the post mortem analysis of results. Our study seeks to expand on the evaluation of search funds and their role within an investment portfolio from an investor’s perspective. We review the background of search fund investing and then present a model for self-assessment by search fund investors and a general guide to screening, monitoring, and exiting search fund investments. We find that although participants in this study maintain that the search fund model aligns the interests of investors and entrepreneurs, honesty and ethics are still the most important considerations for investing. Most investors care about sales skills and operational experience over financial skills or deal-making ability.
{"title":"An Investor’s Guide to Search Funds","authors":"S. Morrissette, Shamus Hines","doi":"10.3905/jpe.2015.18.3.021","DOIUrl":"https://doi.org/10.3905/jpe.2015.18.3.021","url":null,"abstract":"The predominance of search fund research is focused on the mechanics of selection or the post mortem analysis of results. Our study seeks to expand on the evaluation of search funds and their role within an investment portfolio from an investor’s perspective. We review the background of search fund investing and then present a model for self-assessment by search fund investors and a general guide to screening, monitoring, and exiting search fund investments. We find that although participants in this study maintain that the search fund model aligns the interests of investors and entrepreneurs, honesty and ethics are still the most important considerations for investing. Most investors care about sales skills and operational experience over financial skills or deal-making ability.","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129148124","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-05-31DOI: 10.3905/jpe.2015.18.3.019
H. Gray, R. Besosa, Lance Wimmer
The process of developing strategy must account for critical resource constraints—capital, talent, and time; at the same time, implementing strategy must take into consideration execution leadership, communication skills, and slippage.
{"title":"Failed Integrations are the Seed Bed for Turnaround Work: The Pitfalls of Corporate M&A Strategy","authors":"H. Gray, R. Besosa, Lance Wimmer","doi":"10.3905/jpe.2015.18.3.019","DOIUrl":"https://doi.org/10.3905/jpe.2015.18.3.019","url":null,"abstract":"The process of developing strategy must account for critical resource constraints—capital, talent, and time; at the same time, implementing strategy must take into consideration execution leadership, communication skills, and slippage.","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124231100","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-03-19DOI: 10.3905/jpe.2015.18.3.007
Luis E. Pereiro
We introduce a novel method to estimate the risk premium that investors should demand on top of public equity’s return to be properly compensated for the peculiar hazards of investing in venture capital. Unlike existing CAPM-based methods, our benchmarks are based upon direct measures of the factors that affect the value of venture capital portfolios—i.e., illiquidity, hazard of failure and control; being, at the same time, clear of the confounding effects of superior fund management. Our method is an empirically grounded alternative to the rules of thumb employed by institutional investors and fund managers when defining target returns on venture capital.
{"title":"The Venture Capital Premium: A New Approach","authors":"Luis E. Pereiro","doi":"10.3905/jpe.2015.18.3.007","DOIUrl":"https://doi.org/10.3905/jpe.2015.18.3.007","url":null,"abstract":"We introduce a novel method to estimate the risk premium that investors should demand on top of public equity’s return to be properly compensated for the peculiar hazards of investing in venture capital. Unlike existing CAPM-based methods, our benchmarks are based upon direct measures of the factors that affect the value of venture capital portfolios—i.e., illiquidity, hazard of failure and control; being, at the same time, clear of the confounding effects of superior fund management. Our method is an empirically grounded alternative to the rules of thumb employed by institutional investors and fund managers when defining target returns on venture capital.","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"80 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-03-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115330379","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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