Pub Date : 2016-08-11DOI: 10.3905/JPE.2016.2016.1.055
Avi I Turetsky
Using the real-world laboratory of one leading private equity (PE) firm, this paper attempts to directly connect professional competencies to performance outcomes, and more specifically, to skewed performance distributions. Though no published studies appear to focus on the shape of PE return distributions, data presented in multiple studies indicates that returns are right skewed at the levels of funds and individual portfolio company investments. At both levels, a small percentage of actors drive an outsized portion of returns. This paper finds that within one leading PE firm, this right skew exists at both the levels of individual investments and investment professional portfolios. The paper then leverages methods from organizational behavior, finance, and statistics to identify the mixes of investment professional competencies that distinguish right-tail outperformance within the firm, and then attempts to link these to investment outcomes. The paper finds that professionals who lead outperforming investments tend to excel in three different clusters of competencies and related style elements (identifiable behaviors that may be based upon groups of competencies), that they display more robust and varied toolkits within each cluster than do professionals who lead underperformers, and that these mixes of competencies contribute to investment outcomes in identifiable ways.
{"title":"Competencies, Clusters, and Skews in Private Equity: Exploring the Investment Professional Competencies that Distinguish Extreme Outperformance at One Leading PE Firm","authors":"Avi I Turetsky","doi":"10.3905/JPE.2016.2016.1.055","DOIUrl":"https://doi.org/10.3905/JPE.2016.2016.1.055","url":null,"abstract":"Using the real-world laboratory of one leading private equity (PE) firm, this paper attempts to directly connect professional competencies to performance outcomes, and more specifically, to skewed performance distributions. Though no published studies appear to focus on the shape of PE return distributions, data presented in multiple studies indicates that returns are right skewed at the levels of funds and individual portfolio company investments. At both levels, a small percentage of actors drive an outsized portion of returns. This paper finds that within one leading PE firm, this right skew exists at both the levels of individual investments and investment professional portfolios. The paper then leverages methods from organizational behavior, finance, and statistics to identify the mixes of investment professional competencies that distinguish right-tail outperformance within the firm, and then attempts to link these to investment outcomes. The paper finds that professionals who lead outperforming investments tend to excel in three different clusters of competencies and related style elements (identifiable behaviors that may be based upon groups of competencies), that they display more robust and varied toolkits within each cluster than do professionals who lead underperformers, and that these mixes of competencies contribute to investment outcomes in identifiable ways.","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-08-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130926022","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 : 2016-05-31DOI: 10.3905/jpe.2016.19.3.030
Raviraj Karmvir Gohil, Vijay H. Vyas
This article investigates factors driving abnormal returns in private equity funds in India from 2007 to 2012. We find that skill factors such as type of exit route, holding period, size of investment, stage of investment, and type of industry significantly affect abnormal returns of private equity funds. In addition, market factors such as investment year, entry and exit value of S&P CNX Nifty, and market return during the period of the deal as well as a fund’s structure also drive abnormal returns in private equity funds. Finally, stage of investment and the types of industry, sponsor, and exit style, as well as holding period and type of exit route jointly influence abnormal returns in private equity funds.
{"title":"Factors Driving Abnormal Returns in Private Equity Industry: A New Perspective","authors":"Raviraj Karmvir Gohil, Vijay H. Vyas","doi":"10.3905/jpe.2016.19.3.030","DOIUrl":"https://doi.org/10.3905/jpe.2016.19.3.030","url":null,"abstract":"This article investigates factors driving abnormal returns in private equity funds in India from 2007 to 2012. We find that skill factors such as type of exit route, holding period, size of investment, stage of investment, and type of industry significantly affect abnormal returns of private equity funds. In addition, market factors such as investment year, entry and exit value of S&P CNX Nifty, and market return during the period of the deal as well as a fund’s structure also drive abnormal returns in private equity funds. Finally, stage of investment and the types of industry, sponsor, and exit style, as well as holding period and type of exit route jointly influence abnormal returns in private equity funds.","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125465433","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 : 2016-05-31DOI: 10.3905/jpe.2016.19.3.055
Thomas Plenborg, R. C. Pimentel
A literature review suggests eight empirical implementation issues to which practitioners should give increased attention. Implementation issues include how comparable firms are selected, the use of reported versus forecasted earnings, and the most suitable way of calculating averages. We identify a more effective way to handle each implementation issue in order to enhance the accuracy of valuation outputs. By synthesizing the main empirical findings and thereby identifying best practices when applying market multiples, we expect to help analysts, portfolios managers, and investment bankers make more informed decisions when accessing a firm’s value.
{"title":"Best Practices in Applying Multiples for Valuation Purposes","authors":"Thomas Plenborg, R. C. Pimentel","doi":"10.3905/jpe.2016.19.3.055","DOIUrl":"https://doi.org/10.3905/jpe.2016.19.3.055","url":null,"abstract":"A literature review suggests eight empirical implementation issues to which practitioners should give increased attention. Implementation issues include how comparable firms are selected, the use of reported versus forecasted earnings, and the most suitable way of calculating averages. We identify a more effective way to handle each implementation issue in order to enhance the accuracy of valuation outputs. By synthesizing the main empirical findings and thereby identifying best practices when applying market multiples, we expect to help analysts, portfolios managers, and investment bankers make more informed decisions when accessing a firm’s value.","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"63 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130964402","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 : 2016-05-31DOI: 10.3905/jpe.2016.19.3.021
Darek Klonowski
Expansion through acquisitions with the assistance of venture capital offers a unique business opportunity for entrepreneurial firms in the emerging markets of Central and Eastern Europe. This article focuses on Green Booth, a venture capital–backed entrepreneurial firm that expanded its business through acquisitions. The case study analyzes two financial development scenarios and provides actual financial results. The case also notes the value of proceeds achieved by the founding entrepreneur and participating venture capitalists.
{"title":"Venture Capital and Entrepreneurial Growth by Acquisitions: A Case Study from Emerging Markets","authors":"Darek Klonowski","doi":"10.3905/jpe.2016.19.3.021","DOIUrl":"https://doi.org/10.3905/jpe.2016.19.3.021","url":null,"abstract":"Expansion through acquisitions with the assistance of venture capital offers a unique business opportunity for entrepreneurial firms in the emerging markets of Central and Eastern Europe. This article focuses on Green Booth, a venture capital–backed entrepreneurial firm that expanded its business through acquisitions. The case study analyzes two financial development scenarios and provides actual financial results. The case also notes the value of proceeds achieved by the founding entrepreneur and participating venture capitalists.","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126717417","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 : 2016-05-31DOI: 10.3905/JPE.2016.19.3.051
Todd L. Boudreau, Erika E. Alba, Michelle E.P. Nuñez
Many private equity and venture capital firms believe that few, if any, of their funds’ portfolio companies engage in traditional governmental affairs activities such as lobbying or making political contributions to elected officials or candidates. Consequently, they often opt not to conduct a proper due diligence analysis on the political activity of a current or potential portfolio company target. We consistently find, however, that many companies across a range of industries do in fact engage in political activity to varying degrees, and the same attributes that make a company an attractive potential acquisition are also those that would lead a company to be politically active. Higher Security and Exchange Commission scrutiny on private funds will not only reveal compliance issues with regulatory consequences, but also raise issues for the fundraising for future funds.
{"title":"Private Equity Portfolio Company Political Activity","authors":"Todd L. Boudreau, Erika E. Alba, Michelle E.P. Nuñez","doi":"10.3905/JPE.2016.19.3.051","DOIUrl":"https://doi.org/10.3905/JPE.2016.19.3.051","url":null,"abstract":"Many private equity and venture capital firms believe that few, if any, of their funds’ portfolio companies engage in traditional governmental affairs activities such as lobbying or making political contributions to elected officials or candidates. Consequently, they often opt not to conduct a proper due diligence analysis on the political activity of a current or potential portfolio company target. We consistently find, however, that many companies across a range of industries do in fact engage in political activity to varying degrees, and the same attributes that make a company an attractive potential acquisition are also those that would lead a company to be politically active. Higher Security and Exchange Commission scrutiny on private funds will not only reveal compliance issues with regulatory consequences, but also raise issues for the fundraising for future funds.","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"294 ","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134004157","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 : 2016-05-31DOI: 10.3905/jpe.2016.19.3.037
Jonathan O. Adongo
This article examines variation in creditor protection laws to empirically investigate their effect on country-level venture capital investment in Africa. Results, using bank branch density as an instrumental variable, indicate that stronger creditor protection laws have significantly positive effects on seed, start-up, and early and expansion venture capital investments. In addition, the magnitude of such effects on investment at both venture capital stages is relatively larger than the effects on private equity investment. This supports the theory that the effects of a shock to financially constrained companies in imperfect financial markets are magnified when information asymmetry is more severe.
{"title":"Creditor Protection Law Effects on Venture Capital Investment in Africa: Country-Level Evidence","authors":"Jonathan O. Adongo","doi":"10.3905/jpe.2016.19.3.037","DOIUrl":"https://doi.org/10.3905/jpe.2016.19.3.037","url":null,"abstract":"This article examines variation in creditor protection laws to empirically investigate their effect on country-level venture capital investment in Africa. Results, using bank branch density as an instrumental variable, indicate that stronger creditor protection laws have significantly positive effects on seed, start-up, and early and expansion venture capital investments. In addition, the magnitude of such effects on investment at both venture capital stages is relatively larger than the effects on private equity investment. This supports the theory that the effects of a shock to financially constrained companies in imperfect financial markets are magnified when information asymmetry is more severe.","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129281502","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 : 2016-05-31DOI: 10.3905/jpe.2016.19.3.008
J. Lerner, J. Ledbetter, Andrew Speen, A. Leamon, C. Allen
This article examines quantitative data on economic growth, market composition, deal structures, exit opportunities, and manager performance in emerging markets relative to developed markets. We find that despite recent downturns, emerging markets are experiencing overall rapid growth. Moreover, private equity investments appear to focus on companies in high-growth sectors that are underrepresented in public markets, thereby allowing limited partners more balanced exposure to a country’s economic drivers. Furthermore, we find that minority investments in private companies tend to perform on par with majority positions. Finally, because fund manager performance varies widely but also exhibits some consistency, our findings stress the importance of manager selection.
{"title":"Private Equity in Emerging Markets: Yesterday, Today, and Tomorrow","authors":"J. Lerner, J. Ledbetter, Andrew Speen, A. Leamon, C. Allen","doi":"10.3905/jpe.2016.19.3.008","DOIUrl":"https://doi.org/10.3905/jpe.2016.19.3.008","url":null,"abstract":"This article examines quantitative data on economic growth, market composition, deal structures, exit opportunities, and manager performance in emerging markets relative to developed markets. We find that despite recent downturns, emerging markets are experiencing overall rapid growth. Moreover, private equity investments appear to focus on companies in high-growth sectors that are underrepresented in public markets, thereby allowing limited partners more balanced exposure to a country’s economic drivers. Furthermore, we find that minority investments in private companies tend to perform on par with majority positions. Finally, because fund manager performance varies widely but also exhibits some consistency, our findings stress the importance of manager selection.","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116646436","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 : 2016-05-31DOI: 10.3905/jpe.2016.19.3.076
Raviraj Karmvir Gohil, Vijay H. Vyas
In this article, we review the literature on the performance of private equity funds, venture capital funds, fund of funds, buyouts, and reverse buyout funds. We also examine the factors driving performance persistence in private equity funds and in buyout funds. Finally, we describe recent findings on the factors driving private equity returns and review the recent literature related to performance assessment of private equity funds.
{"title":"Private Equity Performance: A Literature Review","authors":"Raviraj Karmvir Gohil, Vijay H. Vyas","doi":"10.3905/jpe.2016.19.3.076","DOIUrl":"https://doi.org/10.3905/jpe.2016.19.3.076","url":null,"abstract":"In this article, we review the literature on the performance of private equity funds, venture capital funds, fund of funds, buyouts, and reverse buyout funds. We also examine the factors driving performance persistence in private equity funds and in buyout funds. Finally, we describe recent findings on the factors driving private equity returns and review the recent literature related to performance assessment of private equity funds.","PeriodicalId":342515,"journal":{"name":"The Journal of Private Equity","volume":"84 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124958255","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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