Journal of Applied Corporate Finance最新文献

Although the phenomenal growth of private equity investments into a $2 trillion market has been widely recognized, little is known about the recent rise of the private credit market, which has doubled to over $1 trillion in the past five years and generated annual returns of close to 9% during the past 15 years. In this panel, three private and public debt professionals discuss the interplay between private equity and debt, pricing pressures, competition for assets, and deal terms for private equity and debt investors in an increasing-interest-rate environment.

Direct lending to PE-owned firms has expanded dramatically since the 2008 global financial crisis, driven in significant part by the effect of Dodd-Frank on traditional banks' lending to their core middle market segment. Alternative lenders such as Blackstone and Ares Capital Management have filled the resulting void in this large market. While much of this activity is direct lending to those small and mid-market companies, another major part is structured or asset-backed lending to a discrete pool of assets wherein repayment of that debt is derived solely from the contractual cash flows coming off those assets rather than from the company.

Morgan Stanley's Vanessa Roberts explains how the private debt markets, as evidenced by their continued growth, complement public debt markets without supplanting them. But as Phil Canfield emphasized, private equity sponsors value the speed of execution and certainty of commitment along with fewer public disclosures that come with private credit. It's typically a less complex process, one that removes regulatory obstacles to risk-reducing structures and ends up providing more flexible solutions. What's more, the dramatic expansion of private capital pools in 2021 has brought much more liquidity to the market and accelerated the move toward cash-flow-based lending.

In what might be called the first principle of modern corporate finance, the primary source and main driver of a company's long-run value is said to be its strategy and what finance academics refer as the corporate investment decision—in brief, what corporate managers choose to do with the capital their investors have entrusted them with. Having committed themselves to a strategy and business plan, and figured out the amount of capital required to carry out the plan, the managers are then assumed to address the financing decision: What's our targeted capital structure? Should it be mostly equity, with few (visible) strings attached; or should it include large amounts of debt, with its contractually fixed and obligatory payments of interest and principal?

Kewsong Lee, CEO of the Carlyle Group was interviewed by Rich Hall, Chief Investment Officer of UTIMCO. From his vantage point at Carlyle overseeing 300 portfolio companies, Lee sees US economic growth as positive but decelerating while inflation continues to be high. So far, Carlyle-owned firms have been able to pass through higher costs to their consumers although the expected Fed tightening would reduce asset values and general confidence.

Lee identified the international focus on climate change and achieving a “net-zero” CO₂ emissions level as a secular change. He warned that decarbonizing will be expensive and difficult to achieve and that divesting of carbon producing assets offered no solution. Private equity firms make their money by improving the operations of the companies they buy and not through financial engineering, according to Lee.

Lee cautioned listeners that a forty year long trend of declining interest rates is now reversing. This will have consequences for the real economy. Nevertheless, Lee emphasized, one should not underestimate the power of companies and technology to improve productivity. Relatively modest rate increases will not damage Carlyle's ability to buy companies as money is available and the leveraged finance markets are “wide open.”

Despite his industry's success, lee said that PE industry has “done a very bad job in helping the outside world appreciate who we are and what we do.” Accordingly, the PE industry must become becoming more stakeholder focused, and more socially comprehensive and aware, while also generating high returns.

The primary approaches for evaluating prospective capital projects, which are investments (outlays) with future financial benefits, are net present value (NPV) and the internal rate of return (IRR), both based on the discounted expected positive and negative cash flows. The NPV formula can be used to provide three additional insights into the evaluation of prospective investment opportunities: normal profit, economic (discounted) payback (or breakeven) period, and maximum investment cost.

A review of over two centuries of discussion of capital budgeting techniques reveals no discussion of two alternative approaches and little discussion of a third. This note explores the evolution of capital budgeting techniques, and explains with examples these variations of the NPV formula as additional approaches to evaluating inherently uncertain investment decisions. The formula can be used to calculate “safety-margins” (also “danger-margins”) in evaluating potential investments.

As with any important policy decision, the question of mandated disclosure for private equity must weigh the potential benefits against the costs of implementation. At the 2022 Private Equity Research Symposium hosted by Oxford University, Oxford's Ludovic Phalippou and UNC-Chapel Hill's Gregory Brown debated the merits of greater mandated financial reporting for private companies. Phalippou's arguments in favor of more disclosure center on the potential lack of alignment between private equity fund general partners (GPs) and limited partners (LPs), which can distort the incentives of GPs to be transparent and honest with LPs. Brown's arguments against increasing mandated disclosure focus on the potentially large costs associated with substantially more reporting, especially for smaller companies. These costs could change the landscape of private investments in a way that reduces investment in innovative, high-growth companies.

As discussed in the predecessor to this article that came out roughly two years ago, each of today's three dominant academic theories of capital structure has trouble explaining the financing behavior of public companies making seasoned equity offerings (SEOs) of their own stock. In conflict with the tradeoff theory, the authors' analysis of some 7,000 SEOs by U.S. industrial companies during the period 1970-2017 finds that the vast majority, or roughly 80%, of them had the effect of moving the companies away from, rather than toward, their target leverage ratios. Inconsistent with the pecking order theory, SEO issuers have tended to be financially healthy companies with considerable unused debt capacity. And at odds with the market-timing theory, SEOs appear to be driven more by the capital requirements associated with the large investment projects that tend to follow them than by favorable market conditions and overvalued stock prices.

Nevertheless, consistent with the tradeoff theory, the authors also find that SEO issuers tend to follow their stock offerings with one or more debt offerings that have the effect of raising their leverage back toward their targets. And whereas all of the three theories are “single-period models” suggesting some degree of shortsightedness and “opportunism” by financial managers, the authors' findings present a picture of long-run-value-maximizing strategic management of corporate capital structures—one that takes account of the company's current leverage in relation to its longer-run target, investment opportunities, and long-term capital requirements, and the costs and benefits associated with alternative sequences of financing transactions.

Building on their earlier article, the authors extend their analysis to examine the payout and well as leverage and investment decisions of SEO issuers—and expand their sample of some 7,000 industrial issuers to include another 1,500 SEOs by regulated utilities. In the wake of the SEOs, both dividends and repurchases tend to increase; but the payout rates for utilities were almost eight times higher than for industrials, and overwhelmingly take the form of dividends rather than buybacks.

In the final sections of the article, the authors first attempt to explain the negative stock price reactions to the announcements of SEOs, and then speculate about the causes of the even more negative, and puzzling, long-run stock returns to industrial, but not utility, SEO issuers.

The thinking and writings of America's most accomplished living corporate finance scholar, MIT professor Stewart Myers, are presented as “a life in three Acts.” Starting with Stew's collaboration with Stanford's Alex Robichek on capital structure and valuation in Act I, the scene then shifts to the subjects of corporate strategy and “real options,” and their import for both valuation and investment and financing decisions. And following an Act III that explores the effects of information costs on capital structure and financing choices, the Epilogue recounts Stew's late forays (with colleague James Read) into the question of risk capital—that is, how much, as well as what kinds of, capital do companies need to support their operations and strategic investment?

As the article says in closing,

Stew's work can be seen as ending where it began. The truly important goal in designing a company's financial and capital structure, as virtually all of his work during the past nearly 60 years has tried to show, is to help ensure that corporate managers are making the best investment and operating decisions. Which in turn brings us back full circle to the first principle of modern corporate finance. For, as we saw earlier when discussing M&M and the Chicago school theory, it is those investment decisions that are the primary source of long-run corporate efficiency and value.

We argue that the cost of equity capital varies much less across firms than previously thought. We find that expected return differences across stocks are short term in nature and become empirically indistinguishable from zero in five years. When we aggregate expected returns over longer periods of time, our results translate into 99% of the firms having their cost of equity within 1% of the market-wide average. The amount of variation in the cost of capital implied by these results is of the order of one-fifth or perhaps only of one-tenth of the variation in firms' discount rates indicated by surveys. Our results suggest that high-risk firms apply much higher, and low-risk firms much lower, discount rates than they should.

Why do differences in firms' cost of equity capital converge in just a few years? This is because the differences in firm characteristics translating into cost of equity differences vanish over time. For example, competition in the product market makes it hard for profitable firms to maintain their edge, allowing less profitable firms to catch up. As a result, firms representing different levels of risk can, over time, be expected to become more like one another. Some differences in firm characteristics, such as in the ratio of the book and market value of equity, can also stem from the mispricing of stocks. Financial markets are arguably more efficient than product markets, so potential differences in mispricing can be expected to converge even faster than differences in firm characteristics.