Our Research Strategy
At IPC, data, research and education improve understanding of the role of private capital in the global economy. An essential first step for generating quality research is access to reliable data. Thus, our top priority is making research-quality data sources widely available to academic researchers.
Access to data on private investments presents challenges, including confidentiality concerns, the proprietary nature of many datasets, and the diffuse nature of private investments. However, we believe that these challenges are best addressed by a deliberate systematic approach through a combined academic effort. In many cases, data owners welcome the benefits derived from confidential analysis of their data by objective academic researchers.
IPC currently focuses on three research areas:
A First Look at the Impact of COVID19 on Commercial Real Estate Prices: Asset Level Evidence
This paper examines the impact of the COVID-19 pandemic on commercial real estate prices. We construct a novel measure of real estate investment trusts’ (REITs’) exposure to the growth in COVID-19 cases at the asset level. We document a negative relationship between this geographically weighted case growth and risk-adjusted returns. More
Nowcasting Net Asset Values: The Case of Private Equity
We apply advances in analysis of mix frequency and sparse data to estimate \unsmoothed" private equity (PE) Net Asset Values (NAVs) at the weekly frequency for individual funds. Using simulations and a large sample of buyout and venture funds, we show that our method yields superior estimates of fund asset values than a simple approach based on comparable public asset and as-reported NAVs. Our method easily accommodates additional data on PE fund portfolios, such as individual holdings, relevant mergers and acquisitions, secondary trades with fund stakes; extends to other illiquid portfolios that are subject to appraisal bias while generating irregular and infrequent cash flows. More
Determinants of International Buyout Investments
Using a comprehensive and proprietary data set on inter-national private equity activity, this paper studies the determinants of buyout investments across 61 countries and 19 industries over 1990–2017. The study finds evidence that macroeconomic conditions, development of stock and credit markets, and the regulatory environment in a country are important drivers of international buyout capital flows. The paper shows that countries with low unemployment, more active stock and credit markets, and better rule of law receive more buyout capital. A difference-in-differences approach is used to explore the regulatory reforms some countries have adopted over the sample period. The find-ings are that countries receive significantly more buyout capital following investor protection and contract enforce-ment reforms. The impact of regulatory reform is more pronounced in countries with better corporate governance standards and education. Buyout investment responds to these factors more so than foreign direct investment and gross domestic fixed investment. More
Filling the U.S. Small Business Funding Gap
Despite having the deepest and most diverse capital markets in the world, the United States still struggles to provide sufficient capital to many small businesses outside of major commercial centers as well as to women-owned and minority-owned businesses regardless of size or location. This paper reviews the academic literature and provides an analysis of some recent data to gain understanding of the causes of these gaps as well as the solutions for filling the gaps. Results indicate that the Small Business Administration’s SBIC program is an effective mechanism for providing capital to underserved geographies as well as to businesses owned by women and underrepresented minorities. More
Evaluating Private Equity performance using Stochastic Discount Factors
We examine the performance of 2,790 private equity (PE) funds incepted during 1979-2008 using Stochastic Discount Factors (SDFs) implied by the two leading consumption- based asset pricing models (CBAPMs)-external habit and long-run risks-as their assumptions appear consistent with investment objectives of avid PE investors. More
Why Defined Contribution Plans Need Private Investments
We examine the impact of including private investment funds into diversified (e.g., balanced and target date fund) portfolios that otherwise hold only public stocks and bonds. Our analysis utilizes a comprehensive sample of 2,515 U.S. private equity funds to create simulated portfolios for 1987-2017 that invest part of their overall equity allocation in these funds. We find that investing in private funds always increases average portfolio returns and reliably increases Sharpe ratios (return per unit of risk). More
Private Company Valuations by Mutual Funds
Mutual funds that hold private securities value these securities at considerably different prices. Prices vary across fund families, are updated every 2.5 quarters on average and are revised dramatically at follow-on funding events. The infrequent, but dramatic price changes yield predictable fund returns, though we find little evidence of fund investors exploiting this opportunity by buying (selling) before (after) the follow-on funding events. Consistent with fund families opportunistically marking up private securities, we find that funds near the top of league tables increase private valuations more around year-end follow-on funding events than funds ranked lower. More
Valuing Private Equity Investments Strip by Strip
We propose a new valuation method for private equity investments. First, we construct a cash-flow replicating portfolio for the private investment, using cash-flows on various listed equity and fixed income instruments. The second step values the replicating portfolio using a flexible asset pricing model that accurately prices the systematic risk in listed equity and fixed income instruments of different horizons. The method delivers a measure of the risk-adjusted profit earned on a PE investment, a time series for the expected return on PE fund categories, and a time series for the residual net asset value in a fund. We apply the method to real estate, infrastructure, buyout, and venture capital funds, and find modestly positive average risk-adjusted profits with substantial cross-sectional variation, and declining expected returns in the later part of the sample. More
Distorting Private Equity Performance: The Rise of Fund Debt
This paper studies the emergence of debt financing by private equity funds. Using confidential data on U.S. buyout funds, we document the increasing use of subscription lines of credit (SLCs) as an additional source of capital. More
Have Private Equity Returns Really Declined?
In a recent paper, “Demystifying Illiquid Assets – Expected Returns for Private Equity,” Ilmanen, Chandra and McQuinn (of AQR) give a perspective on the past, present, and expected future performance of private equity. They conclude that “private equity does not seem to offer as attractive a net-of-fee return edge over public market counterparts as it did 15-20 years ago from either a historical or forward-looking perspective.” This analysis provides our perspective based on more recent and, we think, more reliable data and performance measures – the historical perspective is more positive than Ilmanen et al. portray. More