Public policies aimed at incentivizing the birth and growth of start-up ecosystems in developed countries have so far produced mixed results, and the vast majority have resulted in wasting taxpayers’ money. This failure is the result of mechanically importing policies that have worked in other countries without understanding (1) the real economic goal of start-up policies and (2) how to adopt strategies that have worked elsewhere to the local context. Countries should promote start-ups not because they are a “nice to have” but because, if done right, start-ups can boost the innovation content of an economy and spur economic growth. Governments indeed have a role to play but must target innovation, or they are wasteful. Applying this framework to the Italian 2012 Startup Act, the author finds the effort has not yet produced good results and propose some solutions.
{"title":"When Too Much Is Too Little: Evaluating the Italian Startup Act","authors":"Luca De Angelis","doi":"10.3905/jpe.2018.1.071","DOIUrl":"https://doi.org/10.3905/jpe.2018.1.071","url":null,"abstract":"Public policies aimed at incentivizing the birth and growth of start-up ecosystems in developed countries have so far produced mixed results, and the vast majority have resulted in wasting taxpayers’ money. This failure is the result of mechanically importing policies that have worked in other countries without understanding (1) the real economic goal of start-up policies and (2) how to adopt strategies that have worked elsewhere to the local context. Countries should promote start-ups not because they are a “nice to have” but because, if done right, start-ups can boost the innovation content of an economy and spur economic growth. Governments indeed have a role to play but must target innovation, or they are wasteful. Applying this framework to the Italian 2012 Startup Act, the author finds the effort has not yet produced good results and propose some solutions.","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"3 1","pages":"29 - 39"},"PeriodicalIF":0.0,"publicationDate":"2018-08-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75591546","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 : 2018-05-31DOI: 10.3905/jpe.2018.21.3.001
F. Mathis
Dave bliDe Publisher The Spring 2018 issue of The Journal of Private Equity confirms a pattern of continuing expansion in funding power and investor confidence in seeking new opportunities in venture capital and private equity markets (refer to Market Snapshot, p.82). This persisting trend is due to several factors. Research suggests that the growing wealth of the top 5% of the global population is supporting an expanding investment appetite for higher risks. These investments are in some cases direct investments, but more often they are channeled through institutional investors such as investment banks, investment funds, wealth managers, pension funds, insurance companies, prime brokers, trusts, and family offices. Also, advanced countries’ financial markets remain relatively liquid from central bank measures to end the great recession and restore economic growth and full employment. However, government inaction (infrastructure) and disruptive actions (threatening tariffs on imports) have reduced the attractiveness of public domestic markets and shifted attention to higher-risk private equity markets in other developed and emerging economies markets. The enhanced search for higher “alpha” is emphasizing the increasing importance of private equity in the emerging countries—as illustrated by the expanding number of articles from emerging markets appearing in The Journal of Private Equity. The f lat-lining of public stock markets in the United States and other developed countries so far in 2018 substantiates this shift. The growing supply of liquidity seeking opportunities will eventually exhaust the better investments, and then raise the vulnerability to financial problems with higher-risk investment ventures. New analytical techniques will be necessary to find higher investment returns and avoid these potential future risks. As private equity managers and general partners come under increasing pressure to find more alpha opportunities faster, innovative new approaches to private equity and venture capital investments may be required. The decision-making process of locating attractive investment possibilities in developed countries, and especially in emerging markets, will expand data needs and also increase uncertainties that must be analyzed carefully to avoid performance problems. The requirement is to analyze big data rapidly, to continuously collect and add new information, and to re-analyze in order to monitor and control company performance in line with private equity objectives.
《私募股权杂志》(The Journal of Private Equity) 2018年春季刊证实了一种持续扩张的模式，即融资能力和投资者在风险资本和私募股权市场寻求新机会的信心(参见《市场快照》，第82页)。这种持续的趋势是由几个因素造成的。研究表明，全球最富有的5%人口的财富不断增长，支持了对高风险的投资偏好不断扩大。这些投资在某些情况下是直接投资，但更多时候是通过投资银行、投资基金、财富管理公司、养老基金、保险公司、大宗经纪公司、信托公司和家族理财室等机构投资者进行的。此外，发达国家的金融市场仍然相对流动，因为央行采取了措施来结束大衰退，恢复经济增长和充分就业。然而，政府不作为(基础设施)和破坏性行动(威胁对进口征收关税)降低了国内公开市场的吸引力，并将注意力转移到其他发达和新兴经济体市场的高风险私募股权市场。对更高“阿尔法值”的搜索越来越多，强调了私募股权在新兴国家日益增长的重要性——《私募股权杂志》(The Journal of private equity)上出现的来自新兴市场的文章越来越多，就说明了这一点。2018年到目前为止，美国和其他发达国家的公开股票市场表现平平，证实了这一转变。寻求机会的流动性供应不断增加，最终将耗尽更好的投资，从而增加高风险投资企业面对财务问题的脆弱性。新的分析技术对于寻找更高的投资回报和避免这些潜在的未来风险是必要的。由于私募股权经理和普通合伙人面临越来越大的压力，需要更快地找到更多的阿尔法机会，因此可能需要采用创新的私募股权和风险资本投资方法。在发达国家，特别是在新兴市场寻找有吸引力的投资机会的决策过程将扩大对数据的需求，也增加了必须仔细分析以避免业绩问题的不确定性。要求快速分析大数据，不断收集和添加新信息，并重新分析，以便根据私募股权目标监控公司业绩。
{"title":"Editor’s Letter","authors":"F. Mathis","doi":"10.3905/jpe.2018.21.3.001","DOIUrl":"https://doi.org/10.3905/jpe.2018.21.3.001","url":null,"abstract":"Dave bliDe Publisher The Spring 2018 issue of The Journal of Private Equity confirms a pattern of continuing expansion in funding power and investor confidence in seeking new opportunities in venture capital and private equity markets (refer to Market Snapshot, p.82). This persisting trend is due to several factors. Research suggests that the growing wealth of the top 5% of the global population is supporting an expanding investment appetite for higher risks. These investments are in some cases direct investments, but more often they are channeled through institutional investors such as investment banks, investment funds, wealth managers, pension funds, insurance companies, prime brokers, trusts, and family offices. Also, advanced countries’ financial markets remain relatively liquid from central bank measures to end the great recession and restore economic growth and full employment. However, government inaction (infrastructure) and disruptive actions (threatening tariffs on imports) have reduced the attractiveness of public domestic markets and shifted attention to higher-risk private equity markets in other developed and emerging economies markets. The enhanced search for higher “alpha” is emphasizing the increasing importance of private equity in the emerging countries—as illustrated by the expanding number of articles from emerging markets appearing in The Journal of Private Equity. The f lat-lining of public stock markets in the United States and other developed countries so far in 2018 substantiates this shift. The growing supply of liquidity seeking opportunities will eventually exhaust the better investments, and then raise the vulnerability to financial problems with higher-risk investment ventures. New analytical techniques will be necessary to find higher investment returns and avoid these potential future risks. As private equity managers and general partners come under increasing pressure to find more alpha opportunities faster, innovative new approaches to private equity and venture capital investments may be required. The decision-making process of locating attractive investment possibilities in developed countries, and especially in emerging markets, will expand data needs and also increase uncertainties that must be analyzed carefully to avoid performance problems. The requirement is to analyze big data rapidly, to continuously collect and add new information, and to re-analyze in order to monitor and control company performance in line with private equity objectives.","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"21 1","pages":"1 - 4"},"PeriodicalIF":0.0,"publicationDate":"2018-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47276924","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 : 2018-05-31DOI: 10.3905/JPE.2018.21.3.023
Manu Sharma
In this article, the author develops an equation to calculate the cost of equity when valuing private equity investments. The cost of ownership is employed as a discount rate when discount cash flow methodology is employed to determine the value of the capital of a company. The equation is built incorporating three factors: market returns, private equity index returns, and illiquidity. Illiquidity is essential, as private equity investments do not trade as readily as securities trading in public stock markets. By using different weights for each of the factors with boundary conditions, the author illustrates how different weights of elements can be used to influence the cost of equity in a private equity investment.
{"title":"New Method of Determining Cost of Equity in Private Equity Investments","authors":"Manu Sharma","doi":"10.3905/JPE.2018.21.3.023","DOIUrl":"https://doi.org/10.3905/JPE.2018.21.3.023","url":null,"abstract":"In this article, the author develops an equation to calculate the cost of equity when valuing private equity investments. The cost of ownership is employed as a discount rate when discount cash flow methodology is employed to determine the value of the capital of a company. The equation is built incorporating three factors: market returns, private equity index returns, and illiquidity. Illiquidity is essential, as private equity investments do not trade as readily as securities trading in public stock markets. By using different weights for each of the factors with boundary conditions, the author illustrates how different weights of elements can be used to influence the cost of equity in a private equity investment.","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"21 1","pages":"23 - 25"},"PeriodicalIF":0.0,"publicationDate":"2018-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.3905/JPE.2018.21.3.023","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41980319","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 : 2018-05-31DOI: 10.3905/jpe.2018.21.3.009
J. Milam
One of the articles in the Spring Edition of The Journal of Private Equity explores why positive risk-adjusted returns, namely alpha, has been limited to a select group of venture funds and investors. That article recommends possible causes and proffered solutions. This article explores in greater detail the (potential) answers to the chronic “negative alpha” typical of the venture asset class. The author also presents the most recent thinking on venture portfolio construction, and shared investment selection philosophies and practices from the public securities market (hint: picking stocks does not work). Included are insights from institutional investors that have heretofore avoided the venture asset class due to the chronic “negative alpha,” and how a new approach using Smart Beta filtering could attract more institutional capital earlier in the startup lifecycle. The interests and motivations of the modern Impact investor today are remarkably similar with the original roots, and could represent the next wave of capital flowing into early-stage entrepreneurial companies. Success may come with a lowering of the cost of capital for entrepreneurs seeking funding and the equity risk premium applied by investors, moving the efficient frontier on the asset class up and to the left.
《私募股权杂志》(the Journal of Private Equity)春季版的一篇文章探讨了为什么风险调整后的正回报(即alpha)仅限于一群精选的风险基金和投资者。那篇文章提出了可能的原因并提供了解决方案。本文更详细地探讨了风险资产类别典型的长期“负阿尔法”的(潜在)答案。作者还介绍了对风险投资组合构建的最新思考，并分享了公开证券市场的投资选择哲学和实践(提示:选股行不通)。其中包括机构投资者的见解，他们迄今为止由于长期的“负阿尔法”而避开风险资产类别，以及使用智能贝塔过滤的新方法如何在创业生命周期的早期吸引更多的机构资本。今天，现代影响力投资者的兴趣和动机与最初的根源非常相似，并且可能代表下一波资本流入早期创业公司。成功可能伴随着寻求融资的企业家的资本成本的降低，以及投资者施加的股权风险溢价的降低，从而使资产类别的有效边界向上和向左移动。
{"title":"How Proper Information, Effective Risk Management, and Legacy Capital Can Solve the Funding Gap","authors":"J. Milam","doi":"10.3905/jpe.2018.21.3.009","DOIUrl":"https://doi.org/10.3905/jpe.2018.21.3.009","url":null,"abstract":"One of the articles in the Spring Edition of The Journal of Private Equity explores why positive risk-adjusted returns, namely alpha, has been limited to a select group of venture funds and investors. That article recommends possible causes and proffered solutions. This article explores in greater detail the (potential) answers to the chronic “negative alpha” typical of the venture asset class. The author also presents the most recent thinking on venture portfolio construction, and shared investment selection philosophies and practices from the public securities market (hint: picking stocks does not work). Included are insights from institutional investors that have heretofore avoided the venture asset class due to the chronic “negative alpha,” and how a new approach using Smart Beta filtering could attract more institutional capital earlier in the startup lifecycle. The interests and motivations of the modern Impact investor today are remarkably similar with the original roots, and could represent the next wave of capital flowing into early-stage entrepreneurial companies. Success may come with a lowering of the cost of capital for entrepreneurs seeking funding and the equity risk premium applied by investors, moving the efficient frontier on the asset class up and to the left.","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"21 1","pages":"13 - 9"},"PeriodicalIF":0.0,"publicationDate":"2018-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48717158","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 : 2018-05-31DOI: 10.3905/jpe.2018.21.3.014
G. Bulgarelli, Gianfranco Gianfrate
The authors investigate the impact of Sovereign Wealth Funds’ (SWFs) investments on the target firm’s bondholders. Their sample comprises 166 deals carried out during the period 2000–2016. They find that when SWFs invest in target companies, a reduction of the perceived credit risk follows and the value of the debt for existing bondholders rises. The market reaction for traded bonds appears to be positively associated with the level of transparency of the fund and to the rating of targets’ bonds. Overall, these results support the view that SWFs have a “certification role” for bondholders and determine a consistent increase in the value of invested firms that accrue to both shareholders and bondholders.
{"title":"Sovereign Wealth Funds’ Investments and Corporate Bondholders","authors":"G. Bulgarelli, Gianfranco Gianfrate","doi":"10.3905/jpe.2018.21.3.014","DOIUrl":"https://doi.org/10.3905/jpe.2018.21.3.014","url":null,"abstract":"The authors investigate the impact of Sovereign Wealth Funds’ (SWFs) investments on the target firm’s bondholders. Their sample comprises 166 deals carried out during the period 2000–2016. They find that when SWFs invest in target companies, a reduction of the perceived credit risk follows and the value of the debt for existing bondholders rises. The market reaction for traded bonds appears to be positively associated with the level of transparency of the fund and to the rating of targets’ bonds. Overall, these results support the view that SWFs have a “certification role” for bondholders and determine a consistent increase in the value of invested firms that accrue to both shareholders and bondholders.","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"21 1","pages":"14 - 22"},"PeriodicalIF":0.0,"publicationDate":"2018-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43554112","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 : 2018-05-31DOI: 10.3905/jpe.2018.21.3.026
Alex da Silva Alves, J. A. Pimenta-Bueno
This article addresses the challenge of quantifying the capital requirements of new entrepreneurial firms in their early fast-growing phase, a topic the authors believe has not yet received much attention in the specialized entrepreneurial finance literature. All too often, entrepreneurs underestimate the capital requirements demanded by their planned growth paths, a practice that has obvious and severe consequences for both their firms’ and their own wellbeing. Unrealistic capital estimates also affect investors in these ventures, as a shortage of capital often causes ventures to fail to attain contractually agreed-upon goals. As a response to these challenges, the authors propose the framework of an empirically based tool to assist both entrepreneurs and investors in their challenging joint task of quantifying the relationship between capital requirements and innovation performance. In building and testing the model, they use data from Brazilian entrepreneurial firms in the portfolio of a Brazilian seed fund between 2008 and 2016.
{"title":"Quantifying the Capital Requirements of Start-Ups in Early Growth Phase: Exploratory Evidence from a Seed Capital Fund in Brazil","authors":"Alex da Silva Alves, J. A. Pimenta-Bueno","doi":"10.3905/jpe.2018.21.3.026","DOIUrl":"https://doi.org/10.3905/jpe.2018.21.3.026","url":null,"abstract":"This article addresses the challenge of quantifying the capital requirements of new entrepreneurial firms in their early fast-growing phase, a topic the authors believe has not yet received much attention in the specialized entrepreneurial finance literature. All too often, entrepreneurs underestimate the capital requirements demanded by their planned growth paths, a practice that has obvious and severe consequences for both their firms’ and their own wellbeing. Unrealistic capital estimates also affect investors in these ventures, as a shortage of capital often causes ventures to fail to attain contractually agreed-upon goals. As a response to these challenges, the authors propose the framework of an empirically based tool to assist both entrepreneurs and investors in their challenging joint task of quantifying the relationship between capital requirements and innovation performance. In building and testing the model, they use data from Brazilian entrepreneurial firms in the portfolio of a Brazilian seed fund between 2008 and 2016.","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"21 1","pages":"26 - 37"},"PeriodicalIF":0.0,"publicationDate":"2018-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.3905/jpe.2018.21.3.026","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46551529","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 : 2018-05-31DOI: 10.3905/jpe.2018.21.3.038
Sulaiman T. Al-Abduljader
This article analyzes the Middle East and North African private equity markets by incorporating key aspects representing four main clusters: governance, regulatory/legal frameworks, management, and finance. Using a convergent interviewing technique to explore 352 institutions across 13 countries in the region, the findings present specific contributions concerning all four clusters. The results guided the design of a systematic post-acquisition approach to value creation beyond financial engineering that is perceived to be more applicable to emerging markets, given the current evolving regulatory frameworks. Lastly, the author presents policy recommendations for establishing an active alternative investments market. The results reveal the need to depart from stand-alone, country-specific, government-owned SME exchanges into a regional, partially privatized Alternative Investments Market.
{"title":"On the MENA Private Equity Puzzle: Insights and Recommendations","authors":"Sulaiman T. Al-Abduljader","doi":"10.3905/jpe.2018.21.3.038","DOIUrl":"https://doi.org/10.3905/jpe.2018.21.3.038","url":null,"abstract":"This article analyzes the Middle East and North African private equity markets by incorporating key aspects representing four main clusters: governance, regulatory/legal frameworks, management, and finance. Using a convergent interviewing technique to explore 352 institutions across 13 countries in the region, the findings present specific contributions concerning all four clusters. The results guided the design of a systematic post-acquisition approach to value creation beyond financial engineering that is perceived to be more applicable to emerging markets, given the current evolving regulatory frameworks. Lastly, the author presents policy recommendations for establishing an active alternative investments market. The results reveal the need to depart from stand-alone, country-specific, government-owned SME exchanges into a regional, partially privatized Alternative Investments Market.","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"21 1","pages":"38 - 52"},"PeriodicalIF":0.0,"publicationDate":"2018-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48600169","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}
Using a comprehensive sample of RLBOs (reverse leveraged buyouts) from 1981 to 2006, this paper analyzes buyout sponsors’ exit strategies to assess whether their market timing affects the LBO restructuring process. The results indicate that LBO duration is negatively related to hot both IPO market conditions and industry valuation, which suggests that sponsors spend less time restructuring LBOs under more favorable external market conditions. RLBOs with shorter LBO duration experience greater deterioration of performance and the listing of immature LBOs (quick flip) leads to a high probability of bankruptcy. Moreover, post IPO, buyout sponsors tend to exit selectively; that is, they are more likely to exit when industry valuation is higher, and the more reputable sponsors are more likely to do so via facilitating takeovers.
{"title":"Are Buyout Sponsors Market Timers in RLBOs?","authors":"Jerry X. Cao","doi":"10.2139/ssrn.1031690","DOIUrl":"https://doi.org/10.2139/ssrn.1031690","url":null,"abstract":"Using a comprehensive sample of RLBOs (reverse leveraged buyouts) from 1981 to 2006, this paper analyzes buyout sponsors’ exit strategies to assess whether their market timing affects the LBO restructuring process. The results indicate that LBO duration is negatively related to hot both IPO market conditions and industry valuation, which suggests that sponsors spend less time restructuring LBOs under more favorable external market conditions. RLBOs with shorter LBO duration experience greater deterioration of performance and the listing of immature LBOs (quick flip) leads to a high probability of bankruptcy. Moreover, post IPO, buyout sponsors tend to exit selectively; that is, they are more likely to exit when industry valuation is higher, and the more reputable sponsors are more likely to do so via facilitating takeovers.","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"41 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2009-08-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87084015","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}
We analyze the differences between companies owned by private equity (PE) investors and similar public companies. We document that PE-owned companies use much stronger incentives for their top executives and have substantially higher debt levels. However, we find little evidence that PE-owned firms outperform public firms in profitability or operational efficiency. We also show that the compensation and debt differences between PE-owned companies and public companies disappear over a very short period (one to two years) after the PE-owned firm goes public. Our results raise questions about whether and how PE firms and the incentives they put in place create value.
{"title":"Managerial Incentives and Value Creation: Evidence from Private Equity","authors":"Phillip Leslie, Paul D. Oyer","doi":"10.2139/ssrn.1341889","DOIUrl":"https://doi.org/10.2139/ssrn.1341889","url":null,"abstract":"We analyze the differences between companies owned by private equity (PE) investors and similar public companies. We document that PE-owned companies use much stronger incentives for their top executives and have substantially higher debt levels. However, we find little evidence that PE-owned firms outperform public firms in profitability or operational efficiency. We also show that the compensation and debt differences between PE-owned companies and public companies disappear over a very short period (one to two years) after the PE-owned firm goes public. Our results raise questions about whether and how PE firms and the incentives they put in place create value.","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"29 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2008-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82686644","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}
We derive a diffusive stochastic differential equation that describes the dynamics of the venture capital (VC) industry and use it to study two related issues that are concerned with the evolution of the venture capital and the high technology sectors over time. First, the short-term cyclical behavior of the venture capital industry is discussed. Then, we deal with the optimal funding of the public sector for supporting the high technology sector. We address the first issue via a differential equation. For the latter issue, we construct a decision-making model that yields the optimal funding of the public sector for the high technology sector. Our findings indicate that the VC industry is highly correlated with the US capital markets. Hence, the NASDAQ composite stock index can be used for the estimation of the evolution of the venture capital industry with respect to the relevant industry-related variables such as fundraising, the average deal size, the total number of investments and the like. In general, the optimal funding policy of the public sector is shown to be anti-cyclical with the VC funding. Namely, it should be a dynamic funding policy that is conditioned on VC investments and on the specific industrial sector that is supported. For example, the public sector's support for fast maturing sectors like software and information technology should be different than that of slow maturing sectors like pharmaceuticals and biotechnology.
{"title":"Optimal Public Sector Support for the High Technology Sector in the Presence of Dynamic Venture Capital Funding","authors":"T. Agmon, A. Messica","doi":"10.2139/ssrn.878368","DOIUrl":"https://doi.org/10.2139/ssrn.878368","url":null,"abstract":"We derive a diffusive stochastic differential equation that describes the dynamics of the venture capital (VC) industry and use it to study two related issues that are concerned with the evolution of the venture capital and the high technology sectors over time. First, the short-term cyclical behavior of the venture capital industry is discussed. Then, we deal with the optimal funding of the public sector for supporting the high technology sector. We address the first issue via a differential equation. For the latter issue, we construct a decision-making model that yields the optimal funding of the public sector for the high technology sector. Our findings indicate that the VC industry is highly correlated with the US capital markets. Hence, the NASDAQ composite stock index can be used for the estimation of the evolution of the venture capital industry with respect to the relevant industry-related variables such as fundraising, the average deal size, the total number of investments and the like. In general, the optimal funding policy of the public sector is shown to be anti-cyclical with the VC funding. Namely, it should be a dynamic funding policy that is conditioned on VC investments and on the specific industrial sector that is supported. For example, the public sector's support for fast maturing sectors like software and information technology should be different than that of slow maturing sectors like pharmaceuticals and biotechnology.","PeriodicalId":43579,"journal":{"name":"Journal of Private Equity","volume":"12 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2006-01-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87162637","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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