The author examines the two main exit routes preferred by private equity funds, initial public offerings (IPOs) and mergers and acquisitions (M&A), using quarterly data for Eastern European countries and covering the period 2000–2014. This article follows the work of Black and Gilson (1998), who confirmed the existence of a positive correlation between the number of IPOs (in year t) and the willingness of institutional investors to allocate funds to private equity firms (in year t + 1). Additionally, this article studies M&A as a second exit strategy for private equity investors by mobilizing the economic techniques that are used in time series analysis. The results show that Eastern European private equity firms prefer M&A exits followed by IPOs. The Granger causality test shows the existence of a unidirectional causality of the number of M&A to the volume of private equity investments in Eastern Europe. TOPICS: Private equity, emerging markets, statistical methods
{"title":"The Exit Behavior of Private Equity Firms in Eastern Europe: An Empirical Analysis of the Main Exit Strategies","authors":"Mihai Precup","doi":"10.3905/jpe.2019.1.090","DOIUrl":"https://doi.org/10.3905/jpe.2019.1.090","url":null,"abstract":"The author examines the two main exit routes preferred by private equity funds, initial public offerings (IPOs) and mergers and acquisitions (M&A), using quarterly data for Eastern European countries and covering the period 2000–2014. This article follows the work of Black and Gilson (1998), who confirmed the existence of a positive correlation between the number of IPOs (in year t) and the willingness of institutional investors to allocate funds to private equity firms (in year t + 1). Additionally, this article studies M&A as a second exit strategy for private equity investors by mobilizing the economic techniques that are used in time series analysis. The results show that Eastern European private equity firms prefer M&A exits followed by IPOs. The Granger causality test shows the existence of a unidirectional causality of the number of M&A to the volume of private equity investments in Eastern Europe. TOPICS: Private equity, emerging markets, statistical methods","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"22 1","pages":"83 - 95"},"PeriodicalIF":0.0,"publicationDate":"2019-08-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44693113","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 : 2019-08-30DOI: 10.3905/jpe.2019.22.4.111
I. Sifat, Azhar Mohamad
Empirical works testing randomness of stock prices are abundant. Such findings, however, can be challenged if time-series datasets examined are subjected to price limits, which, ex vi termini, enforce bounded movements. This article examines the random walk hypothesis for the Malaysian equity market under three price limit regimes from January 1994 to September 2017. Price limits have been active in Malaysia’s solitary bourse since 1989 with periodic revisions. Identifying a sample of 407 actively traded instruments that triggered limits on 5,843 occasions, the authors use parametric (Ljung–Box, Lo and MacKinlay, and Chow–Denning) and nonparametric (Wald–Wolfowitz runs and Broock–Decher–Scheinkman independence) tests to investigate whether prices under different circuit breaker regimes follow a random walk path, an indicator of market efficiency. Upon comparison with the composite FBMKLCI index and sectoral indexes—the bulk of which reject the random walk hypothesis—the study finds considerable support for randomness across all regimes for upper and lower limit-hit stocks. Moreover, progressive tightening of the price limit appears to correspond with a lower proportion of limit-hit stocks following a random path. The findings carry implications for regulators and academia. First, the unusually wide price band in Malaysia appears to outperform the tighter limits studied earlier. Second, the findings furnish direct evidence of price randomness and price discovery in the financial economics literature and provide indirect evidence of circuit breaker efficacy to market microstructure literature. Third, econometric issues arising from disparate results of various tests are indicated, with ramifications for methodological developments. The article concludes with suggestions for future research. TOPICS: Emerging markets, fundamental equity analysis, private equity
{"title":"Randomness for Asset Prices Constrained by Price Limit Regimes: A Malaysian Case Study","authors":"I. Sifat, Azhar Mohamad","doi":"10.3905/jpe.2019.22.4.111","DOIUrl":"https://doi.org/10.3905/jpe.2019.22.4.111","url":null,"abstract":"Empirical works testing randomness of stock prices are abundant. Such findings, however, can be challenged if time-series datasets examined are subjected to price limits, which, ex vi termini, enforce bounded movements. This article examines the random walk hypothesis for the Malaysian equity market under three price limit regimes from January 1994 to September 2017. Price limits have been active in Malaysia’s solitary bourse since 1989 with periodic revisions. Identifying a sample of 407 actively traded instruments that triggered limits on 5,843 occasions, the authors use parametric (Ljung–Box, Lo and MacKinlay, and Chow–Denning) and nonparametric (Wald–Wolfowitz runs and Broock–Decher–Scheinkman independence) tests to investigate whether prices under different circuit breaker regimes follow a random walk path, an indicator of market efficiency. Upon comparison with the composite FBMKLCI index and sectoral indexes—the bulk of which reject the random walk hypothesis—the study finds considerable support for randomness across all regimes for upper and lower limit-hit stocks. Moreover, progressive tightening of the price limit appears to correspond with a lower proportion of limit-hit stocks following a random path. The findings carry implications for regulators and academia. First, the unusually wide price band in Malaysia appears to outperform the tighter limits studied earlier. Second, the findings furnish direct evidence of price randomness and price discovery in the financial economics literature and provide indirect evidence of circuit breaker efficacy to market microstructure literature. Third, econometric issues arising from disparate results of various tests are indicated, with ramifications for methodological developments. The article concludes with suggestions for future research. TOPICS: Emerging markets, fundamental equity analysis, private equity","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"22 1","pages":"111 - 144"},"PeriodicalIF":0.0,"publicationDate":"2019-08-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47049026","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}
The objective of this article is to examine the market integration among the BRICS (Brazil, Russia, India, China, and South Africa) emerging markets with respect to the global financial crisis of 2008 using cointegration analysis and factor analysis. The study finds that the BRICS emerging markets are cointegrated with each other during the pre- and post-2008 financial crisis period, and the markets have been moving toward greater integration after the 2008 financial crisis. The Granger causality and Johnsen cointegration tests show that the stock markets of China, India, and Russia have strong short-term and long-run relationships. Factor analysis reveals that the BRICS markets have become closer after the financial crisis. Brazil, Russia, India, and China appear to have close causal linkages. The market integration among BRICS markets is tested using correlation, Granger causality test, Johansen’s cointegration test, and factor analysis. The correlation coefficient among the stock markets of Russia, India, and China increases as markets increase in trade and geographical closeness. This article has practical implications for investors, governments, and multinational companies. TOPICS: Emerging markets, financial crises and financial market history, statistical methods
{"title":"BRICS Emerging Markets Linkages: Evidence from the 2008 Global Financial Crisis","authors":"Ritesh Patel","doi":"10.3905/jpe.2019.1.089","DOIUrl":"https://doi.org/10.3905/jpe.2019.1.089","url":null,"abstract":"The objective of this article is to examine the market integration among the BRICS (Brazil, Russia, India, China, and South Africa) emerging markets with respect to the global financial crisis of 2008 using cointegration analysis and factor analysis. The study finds that the BRICS emerging markets are cointegrated with each other during the pre- and post-2008 financial crisis period, and the markets have been moving toward greater integration after the 2008 financial crisis. The Granger causality and Johnsen cointegration tests show that the stock markets of China, India, and Russia have strong short-term and long-run relationships. Factor analysis reveals that the BRICS markets have become closer after the financial crisis. Brazil, Russia, India, and China appear to have close causal linkages. The market integration among BRICS markets is tested using correlation, Granger causality test, Johansen’s cointegration test, and factor analysis. The correlation coefficient among the stock markets of Russia, India, and China increases as markets increase in trade and geographical closeness. This article has practical implications for investors, governments, and multinational companies. TOPICS: Emerging markets, financial crises and financial market history, statistical methods","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"22 1","pages":"42 - 59"},"PeriodicalIF":0.0,"publicationDate":"2019-08-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44306881","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}
The return earned by the investor in equity investments in the secondary equity market is influenced by the behavioral biases exhibited by the investors. With a sample of 436 secondary equity investors residing in Chennai, this article measured eight behavioral biases exhibited by investors and the actual return earned by investors. The biases measured include representativeness, overconfidence, anchoring, gambler’s fallacy, availability bias, loss aversion, regret aversion, mental accounting, and optimism bias. Regression analysis was done to develop a robust regression model that predicts the actual return earned from equity investments using behavioral biases as the predictors. Biases that have a positive influence on the return and those that have a negative influence on the return were identified by the model. The negative biases identified by the study can help financial advisors and wealth managers to guide their clients to earn good returns by avoiding the negative biases. Conscious efforts can also be made by investors to be cautious about the negative biases identified because these biases hamper the main goal of equity investments, which is good returns. TOPICS: Security analysis and valuation, emerging markets, statistical methods
{"title":"Model to Predict the Actual Annual Return of the Investor with the Investors’ Behavioral Biases as the Independent Variables","authors":"R. Isidore, P. Christie","doi":"10.3905/jpe.2019.1.088","DOIUrl":"https://doi.org/10.3905/jpe.2019.1.088","url":null,"abstract":"The return earned by the investor in equity investments in the secondary equity market is influenced by the behavioral biases exhibited by the investors. With a sample of 436 secondary equity investors residing in Chennai, this article measured eight behavioral biases exhibited by investors and the actual return earned by investors. The biases measured include representativeness, overconfidence, anchoring, gambler’s fallacy, availability bias, loss aversion, regret aversion, mental accounting, and optimism bias. Regression analysis was done to develop a robust regression model that predicts the actual return earned from equity investments using behavioral biases as the predictors. Biases that have a positive influence on the return and those that have a negative influence on the return were identified by the model. The negative biases identified by the study can help financial advisors and wealth managers to guide their clients to earn good returns by avoiding the negative biases. Conscious efforts can also be made by investors to be cautious about the negative biases identified because these biases hamper the main goal of equity investments, which is good returns. TOPICS: Security analysis and valuation, emerging markets, statistical methods","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"22 1","pages":"70 - 82"},"PeriodicalIF":0.0,"publicationDate":"2019-08-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46246365","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}
Some research suggests that private equity returns relative to public market equivalents have declined. This analysis provides our perspective based on more recent data and performance measures. We show that returns in vintage years since the financial crisis have consistently been better than public market returns using a variety of benchmarks and adjustments, and better than returns from the 2006 to 2008 vintages. Consequently, the historical perspective is more positive than suggested by some other studies. TOPICS: Private equity, performance measurement, financial crises and financial market history
{"title":"Have Private Equity Returns Really Declined?","authors":"Gregory W. Brown, S. Kaplan","doi":"10.3905/jpe.2019.1.087","DOIUrl":"https://doi.org/10.3905/jpe.2019.1.087","url":null,"abstract":"Some research suggests that private equity returns relative to public market equivalents have declined. This analysis provides our perspective based on more recent data and performance measures. We show that returns in vintage years since the financial crisis have consistently been better than public market returns using a variety of benchmarks and adjustments, and better than returns from the 2006 to 2008 vintages. Consequently, the historical perspective is more positive than suggested by some other studies. TOPICS: Private equity, performance measurement, financial crises and financial market history","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"22 1","pages":"11 - 18"},"PeriodicalIF":0.0,"publicationDate":"2019-08-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44644142","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}
This article analyzes the impact of demonetization on the volatility of the Indian stock market and assesses the investment certainty in India after demonetization. A symmetric generalized autoregressive conditional heteroskedasticity (1, 1) model has been applied by incorporating a dummy variable for the event of demonetization in the conditional variance equation. This article also looks for percentage change in unconditional variance after demonetization. The results show that after demonetization, the risk related to market price decreased and the certainty of investment increased in the Indian stock market. In addition, the degree of volatility shocks declined in the post-demonetization period in comparison to the pre-demonetization period. TOPICS: Security analysis and valuation, statistical methods, emerging markets, risk management
{"title":"Investment Certainty and Demonetization: Evidence from India","authors":"P. Bangur","doi":"10.3905/jpe.2019.1.086","DOIUrl":"https://doi.org/10.3905/jpe.2019.1.086","url":null,"abstract":"This article analyzes the impact of demonetization on the volatility of the Indian stock market and assesses the investment certainty in India after demonetization. A symmetric generalized autoregressive conditional heteroskedasticity (1, 1) model has been applied by incorporating a dummy variable for the event of demonetization in the conditional variance equation. This article also looks for percentage change in unconditional variance after demonetization. The results show that after demonetization, the risk related to market price decreased and the certainty of investment increased in the Indian stock market. In addition, the degree of volatility shocks declined in the post-demonetization period in comparison to the pre-demonetization period. TOPICS: Security analysis and valuation, statistical methods, emerging markets, risk management","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"22 1","pages":"60 - 69"},"PeriodicalIF":0.0,"publicationDate":"2019-07-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42670807","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}
This article adopts a panel regression approach and examines the impact of capital structure on financial performance for mobile telecommunications operators based in sub-Saharan Africa. It considers eight companies with publicly available annual reports for the seven-year period from 2010 to 2016. Financial performance was measured by return on equity, return on assets, and operating profit margin, whereas capital structure was measured by short-term debt to total assets ratio, long-term debt to total assets ratio, and total debt to total assets ratio. The total number of subscribers, size as measured by revenue, and tangibility were used as the controlling variables. The study provides evidence of a mixed impact of capital structure on financial performance and shows that mobile operators prefer short-term debt to long-term debt. The findings suggest that mobile telecommunication operators need to focus on other factors that have a direct and stronger influence on financial performance, and regulators and governments must ensure a stable operating environment to support the industry’s long-term commitments. Furthermore, operators must develop a profitability mindset and shift their focus from average revenue per user toward profitability per user metrics to have a complete value creation picture that considers the costs associated with these revenues. In doing so, they should embark on digital transformation and explore innovative business models. Although size (revenue) matters, operators should be cautious about narrow pursuits of subscriber growth for growth’s sake at this stage of the industry’s lifecycle. Tangibility also showed a mixed impact on financial performance, and operators should strive to own strategic fixed assets that are key in driving their performance but at the same time consider the efficiency benefits of sharing models as they prepare for 5G. In this respect, strategies that seek to take asset ownership away from the operators, such as monopoly wholesale open-access networks, require very careful consideration before being adopted as universal policy. TOPICS: Private equity, emerging markets, statistical methods
{"title":"The Impact of Capital Structure on Mobile Telecommunication Operators in Africa","authors":"Grant Chivandire, I. Botha, Marise Mouton","doi":"10.3905/jpe.2019.1.085","DOIUrl":"https://doi.org/10.3905/jpe.2019.1.085","url":null,"abstract":"This article adopts a panel regression approach and examines the impact of capital structure on financial performance for mobile telecommunications operators based in sub-Saharan Africa. It considers eight companies with publicly available annual reports for the seven-year period from 2010 to 2016. Financial performance was measured by return on equity, return on assets, and operating profit margin, whereas capital structure was measured by short-term debt to total assets ratio, long-term debt to total assets ratio, and total debt to total assets ratio. The total number of subscribers, size as measured by revenue, and tangibility were used as the controlling variables. The study provides evidence of a mixed impact of capital structure on financial performance and shows that mobile operators prefer short-term debt to long-term debt. The findings suggest that mobile telecommunication operators need to focus on other factors that have a direct and stronger influence on financial performance, and regulators and governments must ensure a stable operating environment to support the industry’s long-term commitments. Furthermore, operators must develop a profitability mindset and shift their focus from average revenue per user toward profitability per user metrics to have a complete value creation picture that considers the costs associated with these revenues. In doing so, they should embark on digital transformation and explore innovative business models. Although size (revenue) matters, operators should be cautious about narrow pursuits of subscriber growth for growth’s sake at this stage of the industry’s lifecycle. Tangibility also showed a mixed impact on financial performance, and operators should strive to own strategic fixed assets that are key in driving their performance but at the same time consider the efficiency benefits of sharing models as they prepare for 5G. In this respect, strategies that seek to take asset ownership away from the operators, such as monopoly wholesale open-access networks, require very careful consideration before being adopted as universal policy. TOPICS: Private equity, emerging markets, statistical methods","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"22 1","pages":"110 - 96"},"PeriodicalIF":0.0,"publicationDate":"2019-07-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43188609","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}
Private equity in Latin America is not for the faint of heart. Over the last 25 years, the industry has grown enormously but has been limited by the impossibility of anticipating regional booms and busts. As a result, predicting the outlook for private equity in Latin America for the years ahead is difficult. A number of factors, both internal and external, are likely to drive growth in individual countries and in the region as a whole. The author analyzes economic and political factors at the global, regional, and national level that will shape private equity investment in Latin American in the upcoming years, including the emergence of venture capital investment and family offices investing in the region. TOPICS: Private equity, commodities, emerging markets
{"title":"Private Equity Investment: The Outlook for Latin America","authors":"Philip T. von Mehren","doi":"10.3905/jpe.2019.1.084","DOIUrl":"https://doi.org/10.3905/jpe.2019.1.084","url":null,"abstract":"Private equity in Latin America is not for the faint of heart. Over the last 25 years, the industry has grown enormously but has been limited by the impossibility of anticipating regional booms and busts. As a result, predicting the outlook for private equity in Latin America for the years ahead is difficult. A number of factors, both internal and external, are likely to drive growth in individual countries and in the region as a whole. The author analyzes economic and political factors at the global, regional, and national level that will shape private equity investment in Latin American in the upcoming years, including the emergence of venture capital investment and family offices investing in the region. TOPICS: Private equity, commodities, emerging markets","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"22 1","pages":"33 - 41"},"PeriodicalIF":0.0,"publicationDate":"2019-07-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46381753","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}
Over the past decade, there has been explosive growth in the amount of financial and operational data portfolio companies generate every day. The growing mass of data makes it difficult for private equity firms to derive the actionable insight necessary to positively impact a fund’s performance. In response to this challenge, private equity groups have turned to technology for help. Data visualization has emerged as a popular and impactful tool for analyzing large amounts of data. Visualization tools can help isolate financial performance issues, accelerate communication, and uncover performance improvement opportunities across a fund’s portfolio. When leveraged correctly, even the process of gathering data for use in visualizations generates performance-enhancing opportunities. However, converting these opportunities into meaningful performance improvement requires an understanding of what data visualization can do for your business and how it can be effectively leveraged across a portfolio. TOPICS: Private equity, performance measurement, quantitative methods
{"title":"Data Visualization Is King","authors":"J. Solis","doi":"10.3905/jpe.2019.1.079","DOIUrl":"https://doi.org/10.3905/jpe.2019.1.079","url":null,"abstract":"Over the past decade, there has been explosive growth in the amount of financial and operational data portfolio companies generate every day. The growing mass of data makes it difficult for private equity firms to derive the actionable insight necessary to positively impact a fund’s performance. In response to this challenge, private equity groups have turned to technology for help. Data visualization has emerged as a popular and impactful tool for analyzing large amounts of data. Visualization tools can help isolate financial performance issues, accelerate communication, and uncover performance improvement opportunities across a fund’s portfolio. When leveraged correctly, even the process of gathering data for use in visualizations generates performance-enhancing opportunities. However, converting these opportunities into meaningful performance improvement requires an understanding of what data visualization can do for your business and how it can be effectively leveraged across a portfolio. TOPICS: Private equity, performance measurement, quantitative methods","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"22 1","pages":"102 - 107"},"PeriodicalIF":0.0,"publicationDate":"2019-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44231343","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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