This paper contrasts private equity data from three leading providers and draws implications for research and practice. If each data provider’s sample were a random draw from the same underlying universe, we’d expect similar messages to emerge across all data sources. This is not the case. Different providers have different mixes of funds (e.g. venture capital versus buyout), especially in periods studied by prior research. Turning to performance data, the picture is even more troubling. Performance data cover only a small fraction of funds started. Moreover, return data from the three sources often signal different performance to limited partner investors. Some of these differences are not readily explained by random variation and suggest systematic effects related to data methods and sample selection. We also review findings of past research on private equity with particular attention to the data used. Our findings highlight the need for better private equity data to improve investment decisions and enable research. We conclude with thoughts on steps toward such improved data.
Research Papers - Private Equity
Using a novel dataset on global private equity investments in 19 industries across 48 countries, I find that following private equity investments employment, profitability, and labor productivity increase for publicly listed companies in the same country and industry. This suggests that positive externalities created by private equity firms are absorbed by other companies within the same industry. These effects are more pronounced in countries with stronger legal institutions, where private equity companies can better implement their value-adding strategies. Furthermore, the results are concentrated in countries with moderate levels of innovative capacities, which are shown to be the best absorbers of productivity spillovers in studies on spillovers from foreign direct investments. I further find that capital expenditures of public firms also grow faster subsequent to private equity investments. On the financial side, I provide evidence that industry stock market returns increase after the industry receives venture capital, while buyout investments lead to higher debt levels within the industry.
Condensed version: Does Private Equity Hurt or Help the Economy?, By Serdar Aldatmaz and Gregory W. Brown, 2012. http://areas.kenan-flagler.unc.edu/finance/PERC/AldatmazBrown_white-paper_03-06-13.pdf
Using data on the backgrounds of board members of S&P companies, we show that venture capitalists (VCs) play an important role in mature public firms long after their initial public offering (IPO). Almost one-third of mature public companies have at least one VC director on their board. VC presence on the board is not limited to mature companies that were VC-backed at the time of their IPO – over one-third of mature firms with VC directors were not VC-backed at the time of their IPO. Appointments of VC directors to the board are followed by increases in R&D intensity, innovation output, and greater deal activity with other VC-backed firms. VC director appointments are associated with positive announcement returns and are followed by an improvement in operating performance. Finally, firms experience higher announcement returns from acquisitions of VC-backed targets following the appointment of a VC director to the board. Our results show that in addition to their function as providers of finance, monitoring and advice for small private firms, VCs play a significant role in mature public firms as well. Hence, we illustrate a much broader role for VCs than has been established in the literature.
The increasingly large role played by financial intermediaries, such as venture capitalists and angels, in nurturing entrepreneurial firms and in promoting product market innovation has led to great research interest in the area of entrepreneurial finance and innovation. This paper introduces the special issue of the Review of Financial Studies dedicated to entrepreneurial finance and innovation and highlights some of the promising topics for future research in this area. The special issue combines papers presented at the June 2010 “Entrepreneurial Finance and Innovation (EFIC)” conference, which was jointly sponsored by the Kauffman Foundation and the Review of Financial Studies, with other related papers.