Coller Institute of Private Equity

Private Equity

FindingsInsights from the world’s best private equity research

ISSUE 5 WINTER 2011 / £25 $40 €30

top of the list Do private equity-backed IPOs outperform or underperform their peers? /10

swfs uncovered Financial objectives or political considerations – what drives SWFs? /12

public to privates Can PE’s long-term outlook really improve company performance? /18 The regulatory tangle alumni links Private equity is getting caught up in new How employee networks can rules designed to stabilise the global economy. Can it find a way through? boost your business /23

including contributions from: Arizona State University l Bocconi University l Cass Business School l Harvard Business School l Massachusetts Institute of technology l Stern School of Business l Turin University l University of Chicago Booth School of Business l University of Michigan l University of Oklahoma l University of toronto l © LONDON BUSINESS SCHOOL 2011 Editorial Board

Contents Jeremy Coller Foreword

Professor Francesca Cornelli

Professor Eli Talmor The Coller Institute of Private Equity is now into its third 4 By the numbers year of producing Private Equity Findings. Our publication EBITDA growth key to PE value creation. Fundraising periods increase sharply. Capital calls outstrip has established a niche place in the market, uniquely bringing the world’s best academic research in private distributions for LPs. PE produces healthier companies, say LPs. Refinancing wall pushed back. Special acknowledgements equity to the broader stakeholder community in a highly and thanks to engaging and accessible format. While academic Hans Holmen, research in the industry continues to flourish, this is not Professor Eli Talmor 6 The regulatory tangle Coller Institute of Private Equity, possible without the cooperation of the industry. With As regulators worldwide seek to reduce systemic risk to economies, is private equity getting too caught up in red Executive Director additional data and funding, academics can continue to tape? Viral Acharya, L Watts Hamrick and Christopher J Bellini debate the impact of new US rules and discuss embark on new research projects, thereby enabling a more Professor whether they are really necessary. informed view of private equity, a very important point as Francesca Cornelli the industry continues to come under public scrutiny. This is in fact where our editorial starts in Issue 5 – regulation. In the aftermath of the financial crisis, regulators around the world have looked into ways to promote stability in the financial system. Rightly or wrongly, 10 Top of the list private equity has come under the microscope. In this issue, we look specifically at the implications of the Dodd- Public markets investors remain sceptical about private equity-backed IPOs; a recent study examines whether Frank Act in the US, covering the thoughts of our keynote speaker at the 2011 Private Equity Findings Symposium, they really underperform. Professor Viral Acharya of NYU Stern. IPOs are another area where the financial crisis has had a significant impact. Volatile capital markets have made IPOs difficult and PE firms have had to resort to other exit routes, namely strategic sales and secondary buyouts. But how have PE-backed IPOs actually performed compared with other IPOs? Issue 5 of Findings 12 The truth about SWFs examines this question, looking at a sample of listings on the London Stock Exchange. Despite their importance in the investment arena, little is known about SWFs. How do they build their We then proceed to examine the question of whether quarterly reporting obligations imposed by capital portfolios? How do they perform? And how does politics fit into their investment strategies? We discuss with a markets provide incentives for short-termism by companies. Findings looks at a new research paper which panel of experts. compares plant productivity of public companies with companies that have gone private. You may find the results surprising! In this issue, we also look at some of the world’s largest investors in private equity: sovereign wealth funds. Examining three research papers, the article seeks answers to a range of questions including how SWF 18 The long view investments perform, how they build their portfolios, what determines their appetite for particular investments Private equity often claims to provide a longer-term perspective to the companies it takes private. Yet recent Published by Bladonmore (Europe) Limited and how much they are influenced by political concerns. research finds that there is little evidence that short-termism exists in public companies and that performance Editor: Vicky Meek Our final article takes as its base the paper that was runner-up in the Coller PhD Prize in 2010. This paper looks at alumni links between private equity firms and investment banks, and asks whether these ties increase the is not improved by taking a company private. So what does this mean for PE? Editorial Director: Sean Kearns

James Carey chances of advisers winning mandates and of PE firms winning deals. Sub-editor: Lynne Densham We hope that this edition of Private Equity Findings stimulates a healthy exchange of views. If you have any 23 Alumni advantage? Creative Director: Nigel Beechey thoughts on our articles, we would like to hear them. You can provide your perspectives at Art Director: Ivelina Ivanova www.collerinstitute.com/Research/Findings or by email at [email protected]. The most interesting comments Alumni links between private equity houses and investment banks are common. But what effect do they have on will receive a copy of International Private Equity, authored by Professors Eli Talmor and Florin Vasvari of London Production Manager: Andrew Miller how mandates are awarded and the way auctions are run? A new study comes up with some surprising findings. Business School. Publisher: Sharon May We sincerely thank all contributors to this issue. Stay tuned for future editions of Findings, which will continue Publishing Director: Sophie Hewitt-Jones to showcase the world’s best private equity research. 26 Coller Institute of Private Equity News Group Managing Director: Richard Rivlin We report on the success of the 4th annual Findings symposium, the Coller Institute’s flagship event. Plus a T: +44 (0)20 7631 1155

round-up of recent and upcoming events, as well as research and Coller Prize competition updates. Illustrations: Cover: Mike Murphy Portraits: E: [email protected]

Professor Eli Talmor Professor Francesca Cornelli Chair, Coller Institute Academic Director, Coller Institute

2 | FINDINGS | WINTER 2011 WINTER 2011 | FINDINGS | 3 THE TRIAGO QUARTERLY June 2011

EM PE investors’ proportion of total PE allocation targeted at EM PE*

Dear Reader, SNAPSHOTProportion of total PE 30% allocation targeting EM: A growing number of limited100 partners are receiving net cash NET ASSET VALUES61 - 100% NEAR PRE-CRISIS LEVELS... 25% 90 19% 18% 31 - 60% from investments, after years of net outflow. At the same NAV Evolution time, general partners80 are locking in significant carried 21 - 30% 20% 7% 13% 16 - 20% 70 €60bn interest through trade sales and IPOs.9% And often these STRATEGY Q111 10 - 15% Q2 10 Q3 10 Q4 10 FY 10 15% same general partners 60are using record low interest rates, 16% 6 - 10% 14% Large BO +4.4 % +2.8% As of 2009+7.2% +10.4%As of 2010+27.0% As of September 2011 easier credit terms, and higher debt levels to make clever 1 - 5% 10% 50 deals. But it’s a market of “haves” and 10%“have-nots.” 11%MM BO +2.1 % +4.6% +4.4% +9.0% +21.5% 40 €45bn

Respondents % 18% Typical (median) investor 5% 30 Special Sit. +3.1 % +4.4% +4.7% +7.0% +20.6% Overall, private equity remains burdened22% by poorly 20 Energy +1.9 % +1.8% +3.6% +7.8% +15.9% 0 performing investments made at the height of the credit 19% 10 bubble from 2005 to 2008. These vintages19% hold the bulk VC €30bn +2.8 % +0.4% +2.5% +4.2% +10.2% 5% of private equity’s dry powder0 and most of its unrealized investments. The impact these overhangsNow have on In 2 years' time ...AS SECONDARY PRICING ANTICIPATES MORE MARKUPS... investors raise questions about everything from fundraising 15bn to investment processes and fund strategy. All of the above € C]qÕf\af_k 100 are issues we address in The Triago Quarterly. -5% -5% 90 A round-up of private equity refinancing wall Pushed out As always, we hope the information found here will help €0bn trends and statistics 80 you make informed decisions. 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 By the Numbers European Leveraged Loan Outstandings Maturity Profile for LBOs 70 Sincerely, €60bn n Two years ago, concerns were mounting about NAV Index the amount of debt in private equity-backed portfolio 60 In good health PE heavy lifting driving growth As-35% of 2009 As of 2010 SecondaryAs of September Pricings 2011 companies that needed to be refinanced. The projections Fig 4: Drivers of organic revenue EBITDA growth, 9kl`]j][]kkagf[gflafm]\lgh]jkaklafFgjl` were that, starting from 2012, there would be a wall of The strategies that enable EBITDA growth €45bn PE exits, 2007–2010 Sources9e]ja[Y$[gklj]\m[lagfkYf\j]kljm[lmjaf_hdYq]\ of EBITDA growth 2006-10, by year of exit 50 refinancing that would peak in 2015 and that companies H=mk]\Ydde]l`g\klgY[`a]n]_jgol`l`jgm_`gf]g^ n Investors in PE funds Yfaf[j]Ykaf_jgd]af\]dan]jaf__jgol`&Gh]jYlagfYd 2009 2010 2011 would struggle to deleverage as earnings fell. l`]lgm_`]klj][]kkagfkaf`aklgjqÈ^g[mkaf_gfgj_Yfa[ overwhelmingly30% believe that the 20 40 n Y et the LCD-S&P CIQ chart, which shows the amount ]^Õ[a]f[a]kYf\aehjgn]e]flkafhjg[mj]e]fl0.6 j]n]fm]_jgol`Yf\[gklj]\m[lagfkoal`]imYd]eh`Ykak& industry’s involvement in the Jun Sep Dec Mar Jun Sep Dec Mar JunSep Dec Mar of capital outstanding in the institutional tranches 25% 2.1 3.7 €30bn Gmjklm\qk`gokl`YlH=klYq]\[dgk]lgalkhgjl^gdag companies it backs improves 16 hjY[la[]k[geZaf]\^gjf]Yjdq/(g^=:AL<9 of debt in LBOs, portrays a different picture. The wall performance, according to Coller _jgol`^jge[gklj]\m[lagfkYf\j]kljm[lmjaf_& still exists, but many European PE-backed businesses \mjaf_l`]\goflmjf$Ö]paf_kljYl]_qYkf][]kkYjq& 20% 5.6 1.4 Antoine Dréan 100% H=oYkYZd]lgkhgl_gg\_jgol`ghhgjlmfala]kYf\ Capital’s twice-yearly Global Private 12 Average Top Pricing January - June have reduced debt burdens and successfully Equity15% Barometer for Winter 2011, 2.8 H=ak\a__af_^Yj\]]h]jaflg]n]jqYkh][lg^Y[gehYfqÌk8.0 Triago Founder and Chief Exectutive €15bn refinanced to push back maturities beyond 2015, Z]f]Õl^jge_jgol`afeYjc]l\]eYf\Èem[`g^l`ak which total % of surveys the opinions of 23% 24% gh]jYlagfk&L`]k]^mf\Ye]flYd[`Yf_]kÈo`ad]\a^Õ[mdl[email protected] in some cases as far out as 2019. However, with 20% 8 affgf%[q[da[YdYf\[gmfl]j%[q[da[Ydaf\mklja]k&@go]n]j$ limited10% partners around the world. 3.9 lgY[`a]n]È[d]Yjdq`Yn]l`]_j]Yl]klaehY[lgfhjgÕl0.1 95% continued uncertainty in the debt markets, it remains 16% 96% 12% CAGR (%) 10.1 1.1 far from assured that future refinancing can be [`Yf_af_Zmkaf]kkeg\]dkgjkljYl]_a]k\jgn]gn]j`Yd^g^ 5% _jgol`Yf\`Yn]qa]d\]\Z]ll]jj]kmdlk^gjZgl`H=Yf\0.1 95% 95% n 4 6.7 €0bn gj_Yfa[j]n]fm]_jgol`&9f\$Ykaf=mjgh]$l`]k]^Y[lgjk  As many as 95% of the LPs surveyed 5% 1.8 4.8 completed successfully. 5.1 l`]Zmkaf]kk]kalZY[ck&L`]j]akYdkg_jgoaf_k]flae]fl 2010 2011 2012 2013 2014 201593% 2016 2017 2018 2019 said0% that private equity investment 90% 92% Y[[gmfl]\^gjegj]gj_Yfa[j]n]fm]_jgol`l`Yfl`] Growth Change of New Geographical Pricing Improved l`YlY[`a]naf_]^Õ[a]f[a]kafl`]k]Zmkaf]kk]k[YfZ]1.8 Source: LCD, S&P-Capital IQ resulted in healthier businesses, 0 -1.2 ^mf[lagfYd[`Yf_]keY\]lghja[af_Yf\k]ddaf_afalaYlan]k& in market offering products expansion selling d]n]jY_]\Y[jgkkl`]hgjl^gdag$hjgna\af_Y\\alagfYd echoingdemand the findings of the Ernst 89% & Young value-creation report (see -4 _jgol`ghhgjlmfala]k^gjYddZmkaf]kk]kafl`]H=klYZd]&80 ?]g_jYh`a[Yd]phYfkagf`YkhdYq]\YhYjla[mdYjdq -7.3 85% beyond the numbers opposite). This finding runs counter aehgjlYfljgd]&L`]kmh]jagj_jgol`ghhgjlmfala]kaf Market Change in business Functional to the characterisationselection by somemodel/strategy -8 expertise 70 ]e]j_af_eYjc]lk$hYjla[mdYjdqYk\]n]dgh]\][gfgea]k INSIDE observersN = 51. that Source: PE investors Ernst & behaveYoung data 2006 2007 2008 2009 2010 % of funds categorised in same performance quartile in intermediate years as final year `Yn]klYdd]\$hjgna\]\Y^mjl`]jd]n]j^gjH=lgY\\nYdm]2 like asset-strippers who engage 60 80%11.4 n n n Large BO Large BO MMBO MM BO Venture Early ZqYkkaklaf_hgjl^gdag[gehYfa]kaf]phYf\af_afl`]k] wholesale in value-destruction. Organic revenue growth Cost reduction Net acquisitions and disposals 100 Analysis: Rocky50 Road Ahead The Euraverage numberUS of EUR 100%US Capital Secondaries

Importantly, it captures the views n Other EBITDA CAGR ISSUE 4 eYjc]lklg]phdgall`]_jgol`ghhgjlmfalq$hYjla[mdYjdqaf months private equity Interpretation: 57% of funds of LPs, who are independent third Dry powder, portfolioN = inventory188; excluding ‘no responses’and lack of Af\aYYf\;`afY&>gj]pYehd]$gmjj]k]Yj[`mf[gn]j]\ 40 funds that closed in are in the same quartile in parties in the debate. 70%carry imply difficult times Source: Ernst & Young 80 year 5 as their final quartile; 72 ]na\]f[]g^H=mkaf_alkf]logjcklggh]fl`]ja_`l\ggjk ...AND2007 CALL took to ESTIMATE fundraise, SPELLS FUNDRAISING TROUBLE. Operational efficiencies and improvements 43% will move quartile ^gjZmkaf]kk]kdggcaf_lg]phYf\aflg]e]j_af_eYjc]lk$ 20% 30 according to figures 60 57 59 ZmldY[caf_l`][gflY[lZYk]Yf\dg[Ydcfgo%`go&H=ak in procurement practices combined for nearly from Preqin.Distributions n EBITDA growth is a key driver of valueStrategy products Shift20 and expandingRoundtable geographically. 20% In your opinion, does private equity 70% of EBITDA growth from cost reductions 43 `]dhaf_lg\]%jakcl`]hjg[]kkg^[YhalYdaraf_gfl`] creation10% by PE houses, according to Ernst These measures6.3% accounted for 52% of 9% Calls 38 41 investment generally result in Are investors radically changing habits? 40 33 ghhgjlmfala]kYnYadYZd]aff]oeYjc]lk& & Young’s latest annual study,and Return restructuring. to organic 10revenue growth, compared with 9% warmer waters: How do private2% equity 44% of growth from functional measures 10% 6.3% healthier businesses? 200 investors0% create value? The research, which such as improved0 selling and pricing. 20 No – 5% Private Equity Blog 2% examined European exits of private equity- 0% backed companies5.3% with an entry enterprise n These European results are mirrored in 0 Exaggerated exits, debt cost, falling equity, 100 -10% € 100% Year 1* Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 value150 of more than 150m, found thatsub-par as managers,E&Y’s study of UStroubled exits, which vintages, found that China 5.3% 8 Return to warmer waters A study of 2010 North Americanmuch as 46%exits of the growth in companies 11.5%40% of EBITDA growth in PE-backed -10% Note: Includes only buyout funds versus the U.S. 14% 80 exited -20%between 2006 and 2010 was companies came from organic revenue 20.4 11.5% * Year 1 = vintage + 1 year; vintage defined as72 year of first investment Source: Preqin, Bain analysis accounted for by organic revenue growth, growth, 30% from cost reduction and 20% 14% 2009 2010 2011e 60 n Chastened by the experience57 of59 the last few years, LPs are increasingly looking well beyond the significantly100 above other drivers of value from add-on acquisitions. -20% The average number of months 2009 2010 numbers when assessing which2011e PE funds they should back – with good reason, as the chart from growth, such as bolt-on acquisitions and funds that closed in 2010 took 41 43 40 33 38 Bain & Company’s Private Equity Report 2011 demonstrates. - - JUNE 2011 QUARTERLY THE TRIAGO cost reduction. n The research found that private equity to fundraise, according to nSource: The performance Trago’s of proprietary a fund can only data.be judged at the end of its life when all investments are continues to outperform comparable Preqin. This is a 79% increase20 n More 50 than half this organic revenue growth public companies, notwithstanding on the time taken in 2007, realised; interim performance figures are a poor indication1 of what the ultimate outcome will be. After analysing the interim reported returns of funds, Bain found that only 57% are in the same comes from initiatives that changed the difficult economic conditions. It found demonstrating that fundraising0 Year 1* Year 2 Yearquartile 3 mid-way Year 4 through Year 5 a fund’s Year 6 lifeYear as 7at theYear end 8 of it – the remainder will move up or down Yes – 95% business model or strategy, which points that 40% of the gross investment return has become a far more once all investments are realised. to PE houses engaging in heavy lifting in on PE exits comes from outperformance, protracted and challenging 0 their portfolio companies. These strategic with 31% from stock market returns and process for GPs. One third of n In any case, Bain adds, past track records are far less indicative of how future funds will perform. initiatives included repositioning a company 29% from higher leverage (than public funds that closed in 2010 took Bain suggests that the “widely acknowledged persistence of GP performance across funds may Source: Coller Capital, in its market, developing and selling new company comparables). more than 24 months to raise. have weakened in recent years”. Global Private Equity Barometer, Winter 2011

4 | FINDINGS | WINTER 2011 WINTER 2011 | FINDINGS | 5 Should the PE industry be regulated? Hamrick: “Dodd-Frank hasn’t yet impacted our Contributors Acharya: “Yes and no. There is evidence now in day-to-day lives as GPs. What it impacts is the Private equity is getting caught up in the proliferation academia that perhaps the bank-sponsored back office, the compliance and the amount of private equity funds were not as prudent in their paperwork we have to deal with. We have to of regulation the world over, but nowhere more so than investments as non-bank funds were. Banks have register with the Securities and Exchange the US. How will the Dodd-Frank Act really impact the access to cheaper capital, because of their explicit Commission, or rather, prepare to register: put or implicit guarantees from the government. If the together manuals and processes and procedures. industry and the way it operates? By Clancy Nolan. cost of financing is cheaper for some players, then But most of the regulations that are being the playing field is not level.* imposed are designed with fund managers and “However, I am not convinced that there’s money managers in mind – people who deal in Viral Acharya something wrong with the private equity model public securities. One example: we have to keep Stern School of Business itself. There is typically a lock-up period of about 10 all of our securities at a broker. If you are a fund years in limited partners’ equity investments, and manager, that makes sense. You don’t keep a Acharya is the CV Starr professor there isn’t the kind of run or redemption risk that certificate of stock in your office and risk losing it of economics at New York’s Stern there is with a hedge fund or a bank. They don’t or having someone steal it, but we have to keep School of Business, which he have to repay financing quickly, so PE funds have a our stock certificates at a broker, and pay for that, joined from the Coller Institute lot more flexibility and incentives to do what is right even though they are not marketable securities.” of Private Equity in 2008. He is for their portfolio companies in the long run.” also a research associate in corporate finance at the National Hamrick: “Private equity as an investment should The legislation was passed very quickly. Are Bureau of Economic Research and only be pursued by sophisticated institutional there areas where the legislation falls short a research affiliate at the Centre for investors. If they are sophisticated, the market or over-reaches? Are there areas of concern? Economic Policy Research. demands those investors provide for appropriate Bellini: “One is certainly the threshold terms in controls and transparency, and keep the industry the Volcker Rule and how those get defined. To in line. You can debate whether that’s been the what extent does proprietary trading get defined? case historically. But regulations should be additive The ability to qualify for exemptions, what and achieve a purpose, not just regulation for parameters you establish, these will all have to be regulation’s sake.” gone into in excruciating detail, so firms can Bellini: “In the private equity world – where you determine how they will move forward – whether are dealing with sophisticated parties with no they conform, or should look at spinning out. The public subsidy – I don’t really see the basis for rule will probably be a couple hundred pages if

L Watts Hamrick regulation of the industry. A requirement to register, not more, and they’ve been working on it for a Pamlico Capital where they simply provide their name and people year. The magnitude really can’t be overstated.” know they’re out there… That’s a form of regulation Hamrick: “From an investor perspective, I’m not Hamrick is managing partner at that could be acceptable. From the perspective of aware of anything that will improve the business Pamlico Capital, a firm he joined PE activities, PE funds really were not a lynchpin of or make it materially safer. If one result is that PE in 1988. He was a tax consultant the financial crisis.” firms present themselves in a more consistent at PricewaterhouseCoopers before fashion to institutional investors, and LPs find it that. He invests primarily in the So what are the real effects of Dodd-Frank on easier to evaluate the performance of those firms, business and technology services and communications industries private equity? then I could see that as a positive.” and sits on a number of boards. Acharya: “Not much, directly. The only rule that touches upon PE directly is the so-called Volcker Will Dodd-Frank impact the way deals are Rule. With that, the investments that banks make valued or structured? in hedge funds and private equity firms are going to Acharya: “Work we’ve done confirms that easy The regulatory be subjected to limits. In particular, a bank cannot access to cheap leverage had a direct effect on put more than 3% of its core equity capital into what price private equity firms were willing to pay proprietary trading. A bank cannot own more than for companies during 2003-2007. As this tangle 3% of a particular fund’s capital. This is so the leverage gets retrenched, I think prices will come market doesn’t see a fund tied to, and implicitly down... as we have in fact already seen over the guaranteed by, a particular bank. The Volcker Rule past four years.” This summer marked the one-year equity firms and large financial institutions another fund if they don’t do well, but there is essentially trying to separate commercial Hamrick: “I don’t think the banks were a big isn’t the risk of sudden withdrawal.” anniversary of the signing of the Dodd- with private equity units. Christopher J Bellini banking from investment banking. I don’t think the enough investor in PE that their exit will impact Frank Wall Street Reform and Consumer Viral Acharya, a professor of finance at Yet despite this, PE is being drawn into Fried, Frank, Volcker Rule solves the problem entirely, though, the business. Even if one of the impacts of Protection Act, possibly the most New York University’s Stern School of an environment of more stringent Harris, Shriver & Jacobson as banks and bank holding companies can run regulation is the marginal availability of debt comprehensive attempt to regulate the Business and keynote speaker at the Coller regulation globally. To what extent should large bets even on their traditional banking books, capital, I don’t think it will be enough to impact United States financial markets since the Institute of Private Equity’s 2011 Private private equity be regulated? And how will for example by granting risky and undercapitalised transaction values. It’s more about capital Bellini is a corporate partner at Fried, mortgages. For this, a broader approach to availability than regulation. Right now the amount Great Depression. Equity Findings Symposium, believes that, Dodd-Frank impact the private equity Frank, Harris, Shriver & Jacobson’s Designed to address the causes of the by and large, private equity is the “good industry? To discuss, Private Equity Washington DC office, having joined system-wide increases in leverage and risk taking of money looking for transactions is in excess of recent financial crisis, Dodd-Frank child” of the capital markets. “Firms Findings spoke to Acharya, together with in 2011. He advises banks and other is needed.” the number of good transactions available. That requires regulators to create some 243 identify inefficiencies in companies; they L Watts Hamrick, managing partner for regulated financial institution Bellini: “A draft of the Volcker Rule is still to come. drives transaction values up.” entities on areas such as the Most institutions are waiting to at least see the Bellini: “The regulation will put forth a template rules aimed at providing stability and take them over, fix them and float them Pamlico Capital, and Christopher J Bellini, regulatory aspects of mergers and proposed rule before they go forward with that any kind of transaction that falls under Dodd- transparency in the market. Dodd-Frank back into the market,” he says. “It might be a partner with Fried, Frank, Harris, Shriver acquisitions, strategic investments additional fund operations. They need to be able to Frank must follow. I think it will be extensive. It’s also applies new standards to private hard for a private equity firm to raise & Jacobson. and capital requirements. determine whether it applies.” going to be a much more structured world

6 | FINDINGS | WINTER 2011 * See Private Equity Findings, issue 3, pp17-20 WINTER 2011 | FINDINGS | 7 concerning how you enter into a transaction Volcker Rule or the Glass-Steagall Act. British Evaluating Dodd-Frank: One year later and what you can do afterwards. You are economist Sir John Vickers, the chairman of the going to have to constantly reference these UK’s Independent Commission on Banking, has requirements. It could affect financing to the produced a report saying that Britain ought to extent that regulations add cost. Those costs ring-fence banks from their riskier activities. Private Equity: In Dodd-Frank: One Year On, Viral Acharya have to be absorbed somewhere.” There is support for this approach elsewhere, describes the Dodd-Frank legislation as “a step but it’s not universal, and to the extent that it’s in the right direction”. With most of the details Will there be less financing available for not universal there is risk of jurisdictional still being finalised, Acharya and co-editors deals in the near term? arbitrage – the notion that financial sectors will A marathon or a sprint? Thomas F Cooley, Matthew Richardson and Acharya: “Private equity deals may not see seek out places where they don’t face certain Ingo Walter ask four central questions: the extent of leverage that they could get in the restrictions and set up business there. Will the new regulatory structure make 2003-2007 period. Over time, they might have “Essentially, you are finding that in the financial system more robust to more equity in deals or rely more on high-yield jurisdictions where the debt of the country is shocks by providing institutions with the bond markets (as they did during the boom high and there is a sizeable financial sector the phase of the 1980s).” authorities are adopting a cautious approach to tools to heal themselves? Hamrick: “In the markets in which we operate, the size of their banks. Many countries would not Adequate capital is critical to the health of the leverage is much closer to historic norms than it have the ability right now to provide the 5th Annual financial systems, says Acharya. The question is to the peak years of 2006 and 2007. However, kind of financial sector bailout that happened Private Equity with Dodd-Frank is whether an institution will that has not reduced purchase prices. There is in 2007. Nevertheless, to the extent that the have enough capital and liquidity to withstand less leverage available, but purchase prices are Volcker Rule is specific to the US, the ring- Findings shocks to the economy. And where will capital higher, and we’re putting more equity into deals. fencing proposal is unique to the UK, and so on, requirements be imposed: at the level of the Bellini: “In the short term, levels of financing it is unclear that we will necessarily have a Symposium firm, or on markets and transactions? will remain the same until everyone figures out uniform approach to bank investments in PE. May 2012 Does Dodd-Frank adequately deal with how the regulatory scheme will shake out. It will The hope is that over time, the chief culprit – monitoring and measuring systemic risk? take a while for financing to rev back up to prior bank access to government guarantees and the levels… That could be a multi-year process.” resulting moral hazard – is brought under better When determining risk, regulators should opt for control worldwide.” measures that assess the systemic risk of What will regulations mean for investors, Bellini: “The US is very much out in front in Keynote speakers financial firms using market data or regulatory such as public pension funds? addressing these issues in a comprehensive stress tests. An important concern is the Acharya: “In some senses, it’s going to make statutory manner. In many ways, depending Lynda Gratton - London Business School problem of monitoring risks in the constantly the pension funds more stable. If private equity upon the balances that are struck, if other evolving shadow banking system. Monitoring is investing with a lot of leverage it means countries don’t end up implementing anything, Alexander Ljungqvist - NYU Stern could be enhanced if regulation operated at the pension funds are indirectly taking on a lot of that could create competitive inequities in the Edmund Truell - The Pension Corporation markets or transactions level. exposure to the leverage cycle, too.” worldwide marketplace.” Do the provisions of the Act deal Hamrick: “Any additional transparency for adequately with the problem of too-big- investors is a good thing. If the rules were to But will Dodd-Frank ultimately make the make things safer, whatever that means, I private equity industry safer for investors? 28 and 29 May 2012 to-fail institutions? would agree that’s a good thing. But the cost Acharya: “The short answer is yes, because London Business School The Act prescribes an “Orderly Liquidation of the regulations is ultimately borne by the LPs addiction to leverage can take hold. With less Authority” (OLA) to deal with insolvent financial and their investors. The cost is netted out of leverage, private equity firms will have to rely firms. Acharya asks whether this will be returns. That’s what gets lost in all of this stuff. on their core competencies. Whenever a set Pricing: conceptually right in liquidating systemically As it stands today, these regulations appear to of active investors focuses on their own skill in General £390 important financial firms rather than resolving be more form over substance, and the cost unlocking profits, rather than relying on London Business School Alumni £190 them. Resolutions would mean upfront costs, appears to be in excess of any expected financial engineering or simply adding but there are concerns that the OLA could distort benefit to investors.” leverage, these investors do better. Of course, it London Business School Students £90 incentives for firms in the event of a crisis. Bellini: “I think there will be fewer investment remains to be seen if Dodd-Frank makes the Professors and PhD Students Free To what extent will Dodd-Frank involve the opportunities at lower returns for entities like leverage cycle less extreme, but there are signs public pension funds. Any time you heavily that it will.” mix of automatic “stabilisers”, fixed rules regulate a market, or if a counterparty brings Hamrick: “My view is that it’s hard to tell right Book before 31 January 2012 to take and discretion needed to be effective? with it a lot of requirements, a lot of times they now. We have to recognise that most of these Successful financial regulation needs to strike a just won’t be involved or won’t be eligible in a rules are still up in the air. It’s hard for me to see advantage of the 25% early bird discount balance that encourages innovation and deal. When you regulate transactions the real that the current state of regulations will really (quote CIPEDISCOUNT when booking) competition, monitors innovations designed to question is whether you are in effect making make things safer or more transparent. If the evade regulation and permits discretion and them so costly that they’re not worth doing. regulations achieve that goal, that would be a flexibility on the part of regulators, Acharya Or with counterparties who carry that good thing for the industry.” writes. Striking that balance will not solve all level of regulation, do you not include them in Bellini: “On the whole, with Dodd-Frank, I problems, however. Remaining challenges deals because you aren’t willing to absorb think the costs for private equity firms will include household indebtedness, the need to those costs?” outweigh the benefits. For certain aspects of operations, I would not say they’ll become safer unwind government-sponsored enterprises, the How does Dodd-Frank compare with than they already are, but they could become For further details and to register need to promote a well-capitalised mortgage regulatory efforts in other countries? more transparent. But, the overall effect on please visit: finance system and the need for fiscal Acharya: “Europe by and large tends to be business and growth for the country could Coller Institute readjustments on the government balance sheet. very resistant to doing anything that looks like the be impaired.” of Private Equity www.collerinstitute.com/Events/Show/78

8 | FINDINGS | WINTER 2011

CPEF_SymposiumAd_FINAL!.indd 9 22/11/2011 17:14 HEAD to Head Top of the list The research In The Performance of Private Equity-Backed IPOs, Mario Levis examines 1,595 UK IPOs in the period 1992 to 2005, which between them raised £63bn on the LSE and AIM markets. PE-backed IPOs represent There remains a high degree of suspicion among public 13% of the total number of listings, but 32% (£13.7bn) in terms of amount raised. Venture capital- market investors about companies listed by private equity. backed companies represent 15.7% of volume, but just 9.9% of total amount raised. Yet a recent study shows that private equity-backed IPOs PE-backed IPOs tend to be larger – and not just in terms of market capitalisation (£125m, compared in the UK outperform others over the longer term. with £84m for VC-backed businesses and £100m for other companies). They are also four to seven times larger in terms of net sales and total assets. By Fay Sanders. The buy-and-hold abnormal returns (BHARs), a measure of aftermarket performance, for IPOs as a whole proved negative over the three years post-IPO, predominantly because of poor performance among Stuart McAlpine companies not backed by PE or VC. Meanwhile, VC-backed issues BHARs are flat post-IPO. For McAlpine joined Cinven in 1996 and is a PE-backed IPOs, when adjusted for size, BHARs are 22.4% at the end of the third year. partner in the healthcare and business The paper finds that first-day performance of PE-backed IPOs is lower than that of non-PE backed to make more money the following year.” in volatile conditions. Danish jewellery group services sector teams. He previously IPOs. However, overall, the paper finds that when measured against several benchmarks, and when In his research, Levis found that there were Pandora suffered a sharp drop in share price worked in the Royal Bank of Scotland’s controlling for company market capitalisation, size and industry, PE-backed IPOs achieve positive and marked differences in firm characteristics and the resignation of its CEO after its listing leveraged finance group, having moved across the three groups of IPOs – PE-backed, on the Copenhagen Stock Exchange by PE significant abnormal long-run returns on both equal and value-weighted terms. Positive after-market there from Ernst & Young where he worked VC-backed and others. He found that the firm Axcel at the end of 2010. “PE-backed performance is explained by the companies’ robust operating performance, the continuing involvement in both Boston and London. superior performance over the long term of IPOs with large amounts of debt and of private equity and a marked reduction of debt post-IPO. PE-backed IPOs is positively related to the aggressive pricing won’t do as well in today’s proportion of equity retained by the sponsors markets,” he notes. Mario Levis and the level of leverage immediately after He attributes the recent spate of failed n defiance of the decline in global stock of strategic buyers and consider synergies and be more attractive than cash yield.” In flotation. In addition, the study suggests that PE-backed IPOs to investors’ reluctance to markets, Spanish travel company a potential selling price,” says McAlpine. Yet addition to speaking with investment banks, Levis is professor of finance at the Cass companies in PE-backed IPOs are more buy stock that is still highly leveraged. “When Amadeus has maintained a strong he acknowledges it is difficult to be precise on Cinven consulted various institutional Business School. He is known for his profitable and efficient than those in other the markets are less volatile investors buy, as performance. Its share price grew almost valuation and the volatility of stock markets investors before listing Amadeus. academic and professional work on IPOs, IPOs both on an absolute and industry- they believe PE-owned companies are better 50% in the first six months of being listed makes IPOs a more challenging exit route. “If Amadeus was a clear IPO candidate from private equity and equity trading strategies. adjusted basis. This is in contrast to a number run, with better operating performance and by Cinven and BC Partners in April 2010. At the we had wanted to list Amadeus in August this the outset, McAlpine says. “It had withstood He has worked as a consultant for a major of other studies that have reported a principles, which, in normal market conditions, Itime of writing, the group was trading at €13.60, year, we would have started work on it six the recession and was cash-generative; the bank and for a number of fund management deterioration in operating performance in the would continue post-IPO.” well above its entry share price of €11.90. months previously and then had to pull or company had excellent historic growth and houses and has served as president of the three years post-float. While the paper points to outperformance Stuart McAlpine, a partner at Cinven who delay the IPO,” he notes. Hence the reason good future prospects.” There was no obvious European Financial Management Association. The research also finds that PE-backed IPOs by PE-backed IPOs overall, the results for worked on the listing of Amadeus, says it is private equity typically keeps its options open fit for strategic buyers and with an enterprise have reduced potential for big returns on the venture capital-backed listings are less logical that PE-backed businesses outperform and puts off deciding whether to go for an IPO value of €7.8bn (at the time of listing), PE first day of trading, possibly because they are favourable. In his paper, Levis says the other types of IPO. The success of a private until the last possible moment. buyers were less apparent. Amadeus has priced to reflect the fact they are larger reasons for this difference require further equity listing is largely due to the intensity with “Good IPO candidates should tick all the grown into a very different business from the here is plenty of debate about companies. It shows that while the average research. In particular, he suggests a need for which the companies are managed during PE boxes for institutional investors,” according one Cinven and BC Partners delisted in 2005. how well private equity-backed first-day returns of all IPOs studied were a detailed analysis of corporate governance ownership, he explains. “In IPOs, private to McAlpine. “It depends on market cycles: “We developed an IT outsourcing business and IPOs perform. But a recent 18.6%, first-day returns were just 9.1% for the structures, the nature of engagement of equity transforms businesses to present an in some periods investors will be interested invested to improve Opodo, which had been research paper suggests that private equity-backed companies. “PE-backed private equity sponsors and their operational improved version with top-line growth in a company’s cash yield and ability to pay loss-making,” says McAlpine, adding that the listings by PE houses, in the UK firms tend to be well-run, mature businesses strategies post-float. potential to the public market.” dividends; at other times top-line growth will company’s EBITDA grew from €550m in 2005 at least, do better than their peers. In The in stable industries and don’t need to be priced The continuing economic interest of PE to almost €1bn at the time it was relisted. TPerformance of Private Equity-Backed IPOs, at a discount to make money,” says Levis. It shareholders following an IPO plays a IPOs rarely deliver 100% proceeds on day Mario Levis of Cass Business School discovers is over the longer term that PE-backed fundamental part in the success of the one – as opposed to trade sales “where you can that in the three years following a public companies outperform. business post-listing, McAlpine notes. “It’s lock in the numbers,” McAlpine warns. “With listing, private equity-backed companies Despite this, the financial crisis and recent “pe-backed not about exiting on day one; private equity will “in ipos, pe IPOs you generally only float a percentage of outperformed other types of IPO on the LSE volatility have taken their toll on IPO markets continue to have a significant financial interest your stake, before being locked up for six between 1992 and 2005. around the world. Many private equity houses firms tend to in the firm for two to four years afterwards.” transforms months and subject to trading and macro The fact that PE houses do not usually exit have tried and failed to list their portfolio Although private equity influence will recede events. It could be the greatest business, but completely once they have listed a company companies over the last two years. Permira and be well-run over time, the structural changes imposed by businesses the final proceeds are dependent on stock – they merely reduce their stake – means they Apax Partners pulled their planned IPO of UK businesses the private equity owners should place the to present market conditions.” stay involved and continue to have a say in retailer New Look last year. More recently, company on a firm financial footing over the Cinven currently holds a 3.4% stake in how a company is run, says Levis. “This has Fitness First, owned by BC Partners, had to in stable long term, according to McAlpine. an improved Amadeus and has, to date, generated a total two implications: it gives investors confidence postpone its float on the Singapore stock industries” In order to judge how well suited a company version” cumulative realised value of 6.1x its original that private equity is not simply going to take exchange, citing difficult market conditions. is to an IPO, its owners need to look at investment cost and realised €1.43bn from the money and run, and they see the potential Levis warns against PE-backed firms listing valuation. “They need to gauge the appetite its investment in Amadeus.

10 | FINDINGS | WINTER 2011 WINTER 2011 | FINDINGS | 11 “Another important part is the perceived skills of SWFs in certain sectors. Where they have The truth about SWFs investments in oil and gas, we find more “passive SWF investments abroad in this area, consistent with Sovereign wealth funds have become some of the world’s largest investors over the SWFs believing they have the skill to identify investments are past few years. Yet remarkably little is known about them. How do they construct their investment opportunities in that area on a global basis. Consider Dubai. They have a port, so when blank cheques portfolios? What tend to be their strategies? How do they – and the companies they back – they look at investments in another area, they want for management. perform? And how do political influences affect all this? to take advantage of that knowledge. Singapore has also done this. The historical portfolio of That is why William Megginson companies that the SWF absorbed in the case of University of Oklahoma Singapore included former state-owned enterprises agency costs are Sovereign wealth funds are some of the most closely watched investors to step into the such as airlines. Looking at their portfolio they have magnified” private equity arena, both as LPs and as direct investors in their own right. The Megginson is the professor and Rainbolt since made more airline investments.” development of the Santiago Principles in 2008, established by the International chair in finance at the University of William Megginson, University Working Group of Sovereign Wealth Funds in conjunction with the International Oklahoma, as well as Fulbright Tocqueville Megginson: “But I don’t think you can answer of Oklahoma Monetary Fund, was an attempt to set out governance and accountability arrangements distinguished chair in American studies at this question without gross generalisations. Some the Université Paris-Dauphine. His funds – the Chinese SWF is the best example and make clear SWFs’ focus on generating financial returns. But how does this play out research interest has focused on the here – are being used to gain access to raw in practice? Three pieces of recent research shed light on SWFs’ investment strategies, privatisation of state-owned enterprises, commodities. At the other extreme, the that’s harder to do. However, all this is the performance of their investments and the effect of political influence on their goals. especially those privatisations executed Norwegian SWF is extremely diversified across determined, in theory, by the fact that they have The studies show that SWFs are considerably more likely to take domestic investments, through public share offering, and more both industries and geographical regions and has long-term horizons.” that SWF involvement in public companies is followed by deteriorating business recently on sovereign wealth fund strict rules to prevent it from taking large stakes in investments. He has served as a any investment target – overall, a profile which Al Zain: “It really depends on the investment performance and that politically influenced SWFs tend to chase trends and perform privatisation consultant for the New York appears much more consistent with purely philosophies and strategies of the SWF in poorly. We discussed the results with three of the authors, an SWF and an adviser. Stock Exchange, the OECD, the IMF, the economic objectives.” question – what is the perfect mix of assets for a Chaired by Paul Mackintosh. World Federation of Exchanges, and the given risk factor, and what are their cash needs? World Bank. Al Zain: “I agree. SWFs cannot be easily But, yes, SWFs are long-term players and so PE is grouped together, as they have different seen as a natural fit.” investment philosophies. Some SWFs are more strategic in nature, some are purely commercial, Dyck: “It also depends on the size of the fund. How are SWFs building their portfolios see development in their home markets. And the and others fall in between. Depending on where The SWFs we focused on varied in size from and what determines their appetite for other is that it’s easier to stay out of the spotlight you fit, the motives can be quite different: pure $10bn AUM to – at the other extreme – ADIA, particular investments? associated with public equities if you invest in returns, or value added to the economy. The which some reports put at around $845bn of Dyck: “Many SWFs are sophisticated. Like private companies. trend has been leaning more towards assets pre-crisis. Funds above a certain size can pension plans, they are guided by trying to seek “We found there were two factors driving some geographic and economic diversification – afford to have their own teams to evaluate the best risk-adjusted returns given their longer SWFs away from portfolios associated with mainly to spread risk, and in search of higher- investment opportunities, and perhaps consider horizon, and they’re also quite large. With longer maximising financial returns. One was the fact yield investment opportunities. It also truly co-investment or co-sponsoring deals. We only horizons, it’s not surprising that they would have that there is a learning goal in some of these depends on the life cycle of the fund itself. see this in the larger funds, which have the a higher allocation towards asset classes such as investments. They are used as a means of “At Mumtalakat, our strategy is to diversify within-fund capabilities. Alexander Dyck PE, direct investments in private firms, real building knowledge locally in order to stimulate geographically and – from an asset-class “The other issue is risk and recent experience University of Toronto estate and other alternatives. We see a and diversify economic activity in the SWF’s home Talal Al Zain perspective – to manage risk and create with the asset class. To the extent that they’re Dyck is professor of finance and significant overweighting in those channels. This country. I don’t think it’s a coincidence that, as Bahrain Mumtalakat Holding steady returns.” long-term investors, they shouldn’t be too affected business economics at the Rotman is also because they have financial resources to there’s a need for a more sophisticated financial Company by the current crisis, but I shouldn’t be surprised if School of Management and the ICPM build up their own internal staff to assess sector in Abu Dhabi and Dubai, local SWFs invest How are SWFs determining their portfolio they are under some short-term political pressures professor in pension management at alternative opportunities. in large financial institutions and these institutions Al Zain became CEO of Mumtalakat in balance between asset classes? Where does to reduce their allocations to riskier asset classes.” the University of Toronto. In 2009-2010 “On one level they’re just like any other large subsequently make a decision to shift their 2008. He is chairman of Gulf Air and a private equity fit within this? he was a visiting scholar in finance at investors. They have a home bias, just as we see resources for an important part of investment board member for Bahrain’s Economic Lerner: “Alternatives are certainly an area that How are SWFs influenced by political INSEAD, France. His research interests in pension plans throughout the world. However, banking to the Gulf. Through that investment Development Board. Prior to joining has increased in popularity. In general, there’s concerns? include corporate governance, pension where we do see a difference is in the magnitude SWFs get part of the soft infrastructure, but they Mumtalakat, Al Zain spent 18 years at been a tendency to say, ‘let’s look beyond just the Lerner: “It varies tremendously. Some SWFs have fund management, regulation and of investments in their domestic markets and their are also kick-starting knowledge generation in Investcorp as managing director, was large name-brand funds’. And some of that done a most careful job of building a firewall privatisation, the media and financial emphasis on investing in private companies. Why their local markets. That’s part of the perceived vice president with Chase Manhattan, means, ‘let’s look at other asset classes’, whether between the fund and the political leaders; there markets, and taxation and are they doing this? One reason we find is the domestic need and an important part of why we Geneva, and a corporate banker for infrastructure, timber, or whatever. And some of it are some that have not done as careful a job or corporate finance. development objective – that they would like to see that skewing in their portfolios. Citibank, Bahrain. is saying ‘let’s look at smaller groups’, although made it much of a priority.”

12 | FINDINGS | WINTER 2011 WINTER 2011 | FINDINGS | 13 Megginson: “Some are certainly much more So should SWF investment be used for to the general public – and the most visible “The main reason is that SWFs suffer from a influenced by politicians than others, yet the industrial planning? investments, namely public equity in Western problem common to most state entities. When recent crisis has shown that most funds are Dyck: “A number of the countries that have economies, are those that have probably governance is active, it tends to become the ready to revert towards domestic investments SWFs are emerging economies skewed towards performed the worst over recent years. Given subject of political interference, pushing when the local economy needs backing, which resources and very heavily dependent on a small those disclaimers, yes, their involvement creates investment-target firms to pursue goals other appears to be evidence of non-economic number of industries that produce a lot of real problems, such as excessive political than shareholder-value maximisation, which purposes. The Chinese and Gulf funds appear to underlying risk for the GNP, given their stage of interference, especially at home, and a translates into lower shareholder value. When follow strong central guidance in portfolio development. There’s an economic rationale to monitoring gap, especially abroad.” governance is passive, it leads to a monitoring allocations. The Venezuelan and Russian funds reallocate the capital to try to pursue gap – which allows managers to engage in Josh Lerner were openly raided by politicians when domestic development opportunities: investment can Massimiliano Castelli Al Zain: “I would argue that SWFs can affect suboptimal behaviour, again reducing Harvard Business School budgets became strained. Norway’s fund generate returns in the long term. UBS Global Asset Management performance positively, although I agree that this shareholder value. Passive SWF investments, remains the gold standard, as it appears to be “That does not mean this is or should be the really depends on the SWF itself and whether it is especially when associated with significant Lerner is the Jacob H Schiff the least affected by political influence.” responsibility of the SWF, but in many settings it Castelli holds a PhD in economic an active or passive investor. The fund itself can cash infusions, are blank cheques for professor of investment banking appears to be a factor in their decisions. My policy and a master’s in economics use various levers at its disposal to create value. management – and that is why the agency at Harvard Business School, with a Dyck: “You have to look at why this varies so concern, and what we see in some of the from the University of London. The SWF team can share experience and costs are magnified.” joint appointment in the finance much. One factor is the transparency countries that do that, is that once one allows Previously, he was a lecturer in expertise with the companies. It is also involved in and the entrepreneurial requirements coming from the nature of the politics to be involved in decision-making, it’s economics at the University of Rome, the selection of board members, and in some Lerner: “Performance can suffer in private Italy. In 1997, he left academia and management areas. He founded, underlying political system. Norway is a very hard to see that only the best investment instances executive management.” markets, too. In general in private markets, has several years of experience in raised funding for, and organises different political environment to the Middle opportunities get pursued. Once you’ve opened “For Mumtalakat, supporting company there tends to be a lot of momentum investing analysing economic and financial two groups at the National Bureau East. The second is the organisational choices the door, a lot of things start coming through. developments in emerging markets. performance is a major focus for our among SWFs. A lot of sovereign money tends of Economic Research: that they make. For example, in Norway there’s That’s not to say it can’t be successful; it’s just He is currently global sovereign organisation. Our investment team has built to get invested at times which tend not to be Entrepreneurship and Innovation been much discussion of the SWF, the Global hard in practice to ensure that only the value- strategist in Global Sovereign strong relationships with the portfolio the best times to invest. Our research found Policy and the Economy. He has led Fund. What is not talked about is that in Norway enhancing projects get driven.” Markets, the team at UBS Global companies, and we look to work together to evidence of trend-chasing, rushing into an international team of scholars there’s another fund, the domestic one, and the Asset Management serving unlock potential and add value.” markets at the wrong time. Part of this may be in a multi-year study of the Global Fund is not so subject to political Al Zain: “Industrial planning can be appropriate sovereign institutions globally. to do with the developmental aims of some economic impact of private equity pressures because they already have another as long as the following prerequisites are in place: Do SWF investments in public companies SWFs. This trend seems exacerbated for the World Economic Forum and fund that is investing locally and regionally.” a clear vision from the country in question, really perform poorly and if so, why? where there are political leaders on SWF is the winner of the 2010 Global specific economic objectives, empowered Megginson: “In the long run, SWF equity investment committees.” Entrepreneurship Research Award. Given this bias in some SWFs, can political government institutions, and a private sector- investments in publicly traded firms perform motivations be squared with financial friendly regulatory environment.” poorly, both in absolute terms and relative to other Castelli: “SWF heterogeneity in objectives, objectives? institutional investors. We should emphasise our investment styles and and risk appetite makes it Al Zain: “An SWF’s focus needs to be on Castelli: “Some SWFs are an important pillar for research is focused on the most transparent and difficult to provide an accurate assessment of transparency, corporate governance and long- the development of their economies. For visible investments by SWFs, which means equity overall SWF performance, but based on the term delivery. In the case of SWFs that are instance, Malaysia’s Khazanah invests the bulk investments in publicly traded firms. information provided by SWFs in annual reports, concerned about economic growth and are of its assets within the country as its policy some general remarks on the performance by more strategic in nature, alignment with the mandate is ‘to develop selected industries in SWF type can be made. For example, stabilisation economy is key.” Malaysia on behalf of the government’; one-third funds and Reserve Investment Corporations have of the investments made by Temasek are “High-performing a long-term return on assets oscillating between Dyck: “There are two pressures that come domestic; about half of the assets controlled by 4% and 6%, and that’s a reasonable return when about when you give a state-owned entity some CIC are invested in domestic banks, while the SWFs will go you consider the low inflation/low interest rates investment capital. One is to get the best risk- other half are invested internationally. after long-term prevailing over the last decade and their relatively adjusted returns that fund can achieve; the Furthermore, SWFs that traditionally invest conservative asset allocation. Savings funds tend other is to pursue development objectives. internationally can sometimes be asked by their wealth generation, to oscillate between 5% for those with a That’s particularly important if you’re in a governments to play a role in the domestic commercial traditionally balanced asset allocation – such as country that has some skewed pattern of economy during economic and financial Norges – and 7-8% for SWFs investing into a economic activity. The first pressure drives the distress. So they can be vital to economies.” returns and broader range of asset classes, including real creation of an SWF; the second leads to the estate, hedge funds and private equity (eg GIC creation of what is called a sovereign Does SWF involvement really affect company setting corporate and Alaska Permanent Fund). Indeed, SWFs that development fund. The two pressures come to performance? governance are more diversified into alternative asset classes bear to different degrees on all these entities Megginson: “Not all SWFs are created equal. appear to be better capable of capturing called SWFs. The way I see it is that this There is strong heterogeneity in all dimensions standards” additional sources of alpha.” pressure is always there and it shows up to (investment policy, degree of political Talal Al Zain, Bahrain Mumtalakat different degrees depending on the country interference, etc). Hence, it is hard – and Lerner: “However, there are some indications and the organisational decisions that are made dangerous – to generalise inferences. And a Holding Company that SWFs have been disappointed with their to try to manage those pressures.” good portion of their investments are not visible returns. In SWF private equity investments, one

14 | FINDINGS | WINTER 2011 WINTER 2011 | FINDINGS | 15 “Buying well, selling well or trend you have seen is more interest from them in investing The research alongside other SWFs and in direct investments. That may be managing the portfolio; what’s because they didn’t get as good a return from some of their PE investments as they had hoped, and they believe – rightly or Sovereign Wealth Fund Portfolios, by Alexander Dyck and Adair wrongly – that they can get better results if they invest most important to value creation?” Morse, examines the make-up of present-day SWF holdings across themselves, especially in collaboration across multiple SWFs.” public and private equities and real estate, “using a novel, hand- What will SWFs of the future be like in terms of strategy Professor Eli Talmor collected dataset”. The authors found that a large proportion of the and objectives? funds are pursuing industrial planning and domestic industrial Chairman, Coller Institute of Private Equity, London Business School Al Zain: “SWFs are long-term players and so will continue development as important, or even primary, goals. This supports with their investment objectives and strategies. The high the contention that SWFs are not simply another class of large performers will continue to go after long-term wealth institutional investor, with the same shared objectives of maximising generation, commercial returns, and setting the standards returns, but in fact can have quite different intentions. They found in corporate governance, social responsibility and that almost 14.5% of the variation in portfolio construction between transparency.” funds can be explained by a combination of financial portfolio capture and industrial planning goals, with the latter accounting for Lerner: “To a certain extent, we’ll see the same trends that we’ll Masterclass almost half of variation. see among other investors. In particular, we’re likely to see a lot Josh Lerner, Shai Bernstein and Antoinette Schoar’s research in of emphasis on emerging markets. We’re probably going to see more alternatives of different types. We will probably end up in Private Equity The Investment Strategies of Sovereign Wealth Funds finds that seeing evidence of more building capabilities in-house. They SWFs vary considerably depending on whether they have local will become larger. We can see it in the projections going politicians or external managers driving their investment decisions. forward. But in terms of how successful they’re going to be, Featuring selected case studies External managers are likely to dictate more cross-border and whether the changes we’ve been talking about are investments and to target industries with lower P/E multiples, successful ones or short-term ones, we won’t know for a from our impressive catalogue, triggering positive changes in their investee companies; politically while. In institutional investors in general, there tends to be a guided funds tend to exhibit exactly opposite behaviour. This is not bit of a pendulum effect, with things swinging one way and together with our world-renowned necessarily a negative reflection on politically guided funds, though: then a bit the other way.” these may simply be ready to accept a lower investment return for a faculty and respected industry higher social one. It also finds that SWFs swing between domestic Castelli: “There are two distinguishable trends in the and foreign markets according to which has the higher equity price investment behaviour of SWFs that appear to be enduring: speakers, this three-day programme – perhaps chasing investment fashions. However, in their home an increasing asset allocation to emerging markets and more direct investments. The increasing allocation to will transform your approach to markets, especially in MENA and Asia, SWFs use their home-field emerging markets reflects the shifting of the centre of gravity advantage to invest at significantly lower P/E multiples compared to of the global economy from advanced economies to private equity. cross-border investments. These same non-Western SWFs, emerging markets. The increasing allocation to direct equity especially in Asia, appear to trigger a drop in P/E ratios in their home investments and real assets reflects the increased investments in the year after their commitment, while boosting the capabilities of in-house teams in managing large P/E ratio of their external investments in the same time frame. transactions in listed and unlisted corporations, plus the Although dating from mid-2008, before the outbreak of the low-return environment pushing SWFs to search for financial crisis, The Financial Impact of Sovereign Wealth Fund additional sources of alpha. The increasing allocation to Investments in Listed Companies (by William Megginson, Veljko so-called real assets also reflects a long-term strategy to Leading Financial Thinking Fotak and Bernardo Bortolotti) considers factors still pertinent protect sovereign wealth from inflation.” today. It tracks 75 SWF commitments to listed entities. In particular, Dyck: It’s naïve to believe that political pressures won’t the research found that buy-and-hold returns from SWF stakes in influence SWF decisions. The question is not if, but to what listed companies over two years after investment averaged -41%. extent. A lot of the SWFs are in natural resource-rich places Political factors and governance did not appear to be a factor in this, that are at the moment subject to intense political pressures, as the results were the same across funds at every point along the and these are likely to be accentuated by the current Programme dates: Truman transparency and accountability indices. The most likely environment. It’s hard to focus on the long term and risk- 21 - 23 March 2012 explanation for this surprising result appeared to be simply that large adjusted financial returns under these real near-term SWF investments impose high agency costs on the investee. pressures. What is incredibly important is to set up 24 - 26 October 2012 organisational frameworks that can help insulate SWFs from Visit www.london.edu/pe/ undue political pressures. Call +44 (0)20 7000 7051 Email [email protected] 16 | FINDINGS | WINTER 2011 It is often said that taking a company private gives it greater breathing room to implement long-term changes because it is free from the pressures of quarterly public company

reporting. Yet recent research appears to suggest that hen Warren Buffett’s Berkshire Shiva Rajgopal of the University of Washington. In short-termism is not an issue for public companies. Hathaway completed a $44bn this survey of 401 executives, the authors found So what does that mean for PE’s investment theses on deal to take North America’s that managers said they would take economic take-privates? By Vicky Meek. second-largest railroad company actions that would have negative long-term Burlington Northern Santa Fe consequences and sacrifice value in order to The (BNSF) private in 2010, it meet short-term quarterly earnings benchmarks. generated a lot of column inches. The size of the The incentives for short-termism certainly deal was large by any standards. But there was appear to be present. But can the effect of short- also a lot of press comment about how the move termism be seen in the actual performance of long view would help BNSF take a long-term view of the public companies? This is what three academics market rather than being subject to the short-term – Sreedhar Bharath of Arizona State University pressures supposedly inherent in public and Amy Dittmar and Jagadeesh Sivadasan of the companies. It could concentrate on growth, rather University of Michigan – attempted to establish in than short-term earnings gains, the a 2011 research paper entitled Does Capital commentators said. “This frees up the Market Myopia Affect Plant Productivity? management team, which can be more Evidence from “Going-Private” Transactions (see productive,” Arthur W Hatfield, an analyst at box-out on p21). The work built on earlier Morgan Keenan & Co, was quoted as saying. research carried out by the trio into why And Matt Rose, BNSF’s CEO, was widely companies opted to go private. “In this, we found quoted as suggesting that private ownership that it was possible to predict which ones would would provide greater stability to the company’s delist at the time of flotation – there seemed to long-term investment strategy. “We can look at a be something in their DNA that inclined them one to three-year time frame now,” he said. to be private rather than public companies,” “Warren looks at the entire cycle.” explains Bharath. It’s a well-rehearsed argument. And one that One of the prompts to study short-termism was has apparently been proved by a number of the reporting of the BNSF deal. “There is a studies, including The Economic Implications of widespread belief that public companies are Corporate Financial Reporting, a survey published unable to take a long-term view and that there is a in 2005 and conducted by John R Graham of short-term orientation burden on them because Duke University, Campbell R Harvey of the analysts and public market investors lack a National Bureau of Economic Research and long-term perspective,” says Bharath. “Our The question of jobs

Part of the Bharath et al study examined we tested the three types of transaction The result is a reduction in headcount the differences between the three against whether they were closing the initially, but a creation of new jobs over different types of take-private – those right factories, it emerged that private time as greenfield sites are established. led by management, those taken private equity has a particular skill in identifying “Our results are consistent with the by private companies and those the poorer performing factories.” Davis et al study, although the sample delisted by private equity. The results The findings are similar to those seen only overlaps by a little,” says Bharath. make interesting reading for anyone in Private Equity and Employment by “We found that employment goes down who tracks PE’s job destruction/creation Steven J Davis, John C Haltiwanger, and capital increases, so PE houses are record and who seeks proof of the Josh Lerner, Ron Jarmin and Javier replacing labour with capital, but we industry’s unique skill set. “For the Miranda (featured in Private Equity don’t see any evidence of indiscriminate three types of going-private transaction, Findings, issue 2, pp17-20). In this firing of people. In fact, we found that we found that all three showed similar study, the authors found evidence of public companies cut employment results in that they closed factories “creative destruction” in private equity more than private equity, possibly more quickly than public companies in investments, in which firms redirect because they are investing more in a move to improve efficiency,” says resources from less productive areas of plant productivity-improving measures Bharath. “Interestingly, however, when a business to more productive ones. and less in labour.” Image: Masterfile

18 | FINDINGS | AUTUMN 2011 WINTER 2011 | FINDINGS | 19 The research motivation was to test whether this was really true invest and in which areas rather than in a says Alpert. “There’s also the issue that they by looking at whether, when companies went difference of investment level. Private equity tend to have been part-remunerated through In Does Capital Market Myopia went private even six years after the private, this supposed burden was removed and “Private equity brings with it a rigour based on whether an stock options and so have not wanted to put productivity rose.” investment programme will deliver results and the these at risk. That clearly doesn’t apply in PE. Affect Plant Productivity? Evidence take-private transaction. Their findings were highly unexpected. “We brings with it ultimate decision will be driven by the nature of Everyone’s goal is three to five years out – that’s from Going-Private Transactions, The research also examined plant- believed in the story, so what we found was very the business. Private equity is able to bring clarity when the success of the company and its Sreedhar Bharath of Arizona State level capital stock, employment and surprising,” says Bharath. “We found the a rigour based to what deserves capital investment. Sometimes a strategy will be judged and that’s when University and Amy Dittmar and plant closures to determine whether companies that went private did in fact improve on whether business will need to evolve to keep relevant, but management get their reward.” Jagadeesh Sivadasan, both of the public company managers sought to productivity five years before they delisted and sometimes it will need radical change. In public He suggests that the reason public University of Michigan, sought to boost earnings at the expense of continued to do so by 3-6% after the delisting. an investment companies, when it comes to making big companies and those taken private show the determine whether pressure from longer-term investments. If under- However, we couldn’t conclude that this was changes, there is a risk of inertia.” same results on productivity scores is the result capital markets in the form of investment really existed in public programme will of globalisation. “The issue of whether because they had gone private because the Holmes believes this can lead public quarterly reporting forced publicly companies, after going private there public companies did equally well.” companies to simply continue existing productivity is higher in public companies or deliver results” listed companies to sacrifice long- should be an increase in capital The research studied US manufacturing investment plans, but not necessarily optimally. those that have been taken private is not that term goals for short-term stock and employment, a greater companies at the plant (or factory) level and Roger Holmes, Change “Any decent public company will have a strong relevant today,” says Alpert. “Driving productivity so Bharath concedes that the results might have Capital Partners capex appraisal process. The problem is that improvements, whatever the ownership performance. The authors patience with underperformance and been different if they had examined public markets tend not to look at things with a structure, has been a feature of companies for a compared productivity between a lower propensity to shut down other sectors or possibly even geographies. multi-year perspective and so there can be a long time and so is old news now. It’s a global public companies and those that plants. The authors found that However, the findings robustly negate tendency among public companies to keep marketplace and that forces businesses to be as opted to go private on the basis that companies going private shrink popular opinion. Kingfisher. “In private equity, it’s easier to make evolving rather than making a big investment productive as they can.” becoming a private company would capital and employment following the They also raise questions about some of changes that result in profits going sideways for a upfront to make radical changes. The result can Bharath agrees that competitive forces may relieve management of these transaction and close plants more the benefits often cited for companies to go year because you’ll have tested your thesis with be that a business fails to remain relevant.” well lie behind the results. “We argue that if reporting pressures and that an quickly than the control groups. private. Indeed, one popular rationale for take- due diligence – that doesn’t exist in public In some ways, this is consistent with the short-termism is really an issue, then you improvement in productivity should Further, they established that this is should find a big difference between public and privates among private equity houses is that their companies and so you’re asking a lot of findings in the Bharath et al research. It found be the result. not the result of over-investment by horizons are much longer than public markets shareholders to trust your plans. In my that PE ownership was more likely to result in the private companies’ productivity levels, but we The sample includes 157,391 public companies because there are investors, allowing businesses to pursue longer- experience, that leads to pressure to sustain closure of plants that were unproductive, which don’t, so myopia doesn’t exist,” he says. public US manufacturing plants no differences in productivity term strategies than they would be able to under performance, possibly at the expense of making reflects the point that PE brings more rigour to “However, another interpretation might be that, public ownership structures. the changes necessary.” investment decisions and strategy. However, because we are measuring at factory level, we (not companies) and 29,788 US between public and private company Yet the PE industry argues that this thesis Roger C Holstein agrees. Now managing Bharath et al argue that this still does not lead to may be missing what’s happening at HQ level. manufacturing plants that went plants, suggesting that if myopia remains highly valid, particularly individuals that director at Vestar Capital Partners, he has been better results – at plant level – than at public There may be short-termism in other parts of private, the latter of which are does exist in public companies, it is have operated in both public and private equity involved in a number of companies at board level, companies where less productive factories public business, but this doesn’t affect the tracked for 13 years following the not affecting their operational environments. “The concentration on quarterly including WedMD, MedCo Health and Warner remain open. “PE has a special skill in operational side of these companies. A take-private transaction. performance at the plant level. reporting places a constant pressure on Amex Cable. Holstein says that the differences identifying which are the right plants to close,” tentative explanation for this is that competition The research found no evidence The research splits the take- management to sustain confidence in the market between public and private company horizons are says Bharath. “Yet they still don’t appear to be in the market is making them more efficient that taking a company private private sample into three types: about capex plans and that comes from their marked and that much more can be achieved in getting ahead of the game as you might expect. than they would otherwise be.” improved productivity at plant level management-led buyouts, deals in Ultimately, though, what counts is not the confidence in trading performance,” says a company under private equity ownership than Our conjecture on this point is that PE adds relative to companies that remained which private operating companies Roger Holmes, now managing partner in a listed one. value by avoiding big mistakes but also starts up means by which companies achieve their public. While productivity increased led the deal and private equity of Change Capital Partners after a “I’ve been in private equity now for five years new plants, although this is something we did results, but the results themselves. So, if public by between 3% and 6% following a transactions. When analysing the career as CEO of Marks & and if I could have rewritten my career 25 years not study.” This idea is similar to that found by companies are at least as productive as private Spencer and as a director of ago, I’d have chosen to become involved in PE Davis et al in their study, Private Equity and ones – and productivity is a key measure of take-private transaction at plant three types, the authors found that much earlier,” he says. “That’s despite being Employment (See box-out on p18). success – then the study provides some level, there was little evidence of all three cut capital by between 10% involved in some very successful companies The unwillingness to change – induced by validation that listed company motivations are efficiency gains relative to a control and 20% after going private. Firms across a variety of sectors. I’ve had some very short-term goals – outlined by Holmes is at not as skewed as some might believe, certainly group of plants within public taken private by PE firms and/or interesting experiences with public companies, odds with the way that private equity operates, for larger companies (and that would include companies – in other words, both management cut employment, so but you never forget that you have to report to says Norman W Alpert, co-founder and BNSF). “The findings are positive for public sets of plants improved efficiency to that headcount was between 6% investors every quarter. With private equity, you managing director of Vestar Capital Partners, companies in that the view that myopia is really the same degree. and 7% lower than in control firms. have your eye on the three to five-year view and which has taken several companies private, hurting corporates turns out not to be true – at In addition, if long-term Firms taken private by operating least at the larger end of the market,” says that is shaped by your exit horizon.” including, as part of a club, this year’s $5.3bn investment suffers from myopia in firms and by private equity were Indeed, Holmes suggests that public company acquisition of US food group Del Monte. “We Bharath. “It may be true of smaller firms public markets, then productivity 25% to 30% more likely to close management finds it harder to execute find in companies we have taken private that struggling to survive on public markets, but for differences would show up in the plants, but private equity had a fundamental change in a business for fear of management tends to be tuned in to the idea of the larger, more mature companies, we have being punished by the markets. “The difference producing consistent and steady performance found no evidence of a temptation to cut going-private sample. However, they particular skill in identifying the between the two forms of ownership has more to – their willingness to take risks is blunted by corners to meet EPS targets or to respond to found no evidence of improved plants with low-labour and total- do with the robustness of decisions of whether to their need to report quarterly to shareholders,” quarterly reporting pressures.” operational efficiency in plants that factor productivity for closure.

20 | FINDINGS | WINTER 2011 Winter 2011 | findings | 21 accurate information is the key to success

performance metrics for 5,600 funds

5,900 fund manager profiles

15,300 private equity funds

4,000 LP investor profiles

23,000 buyout deals Image: Masterfile

Investment banks are a popular place for private equity houses to recruit ALUMNI ADVANTAGE? professionals. The primary motive is to gain these employees’ skills and t’s not what you know but who you know, Your Former Employees Matter: Private Equity experience. But new or so the old adage goes. Exploiting Firms and Their Financial Advisors, which was a research suggests that business contacts stretches back as far runner-up in the inaugural Coller PhD Prize alumni links between the as business itself. You only have to look in 2010. at the success of LinkedIn, and what it’s Siming’s motive was to lift the veil on an two groups increase the done for its venture capital backers’ wallets, to opaque nook of the financial markets. The likelihood of advisers Isee how highly personal connections are valued. graduation of investment bankers and other So it seems fair to assume that alumni financial advisers to private equity firms is New York: +1 212 808 3008 - London: +44 (0)20 7645 8888 - Singapore: +65 6408 0122 winning mandates and of houses being invited to networks in private equity play a pivotal role in commonplace, a natural progression. And, www.preqin.com the machinations of the industry. It’s this as Siming finds, this graduation has “great processes. Brendan assumption that Linus Siming of Bocconi impact” for both the former and successor Scott investigates. University sought to test in his research paper, employers. “For investment banks, their alumni

WINTER 2011 | FINDINGS | 23

alternative assets. intelligent data. preqinad_v4_b&w_PE.indd 1 23/11/2011 14:24:08 bring them revenue,” he says. “While for private participate in auctions if the adviser employed International equity funds, the information they can get members of the fund manager’s team. And, access to from hiring former investment bankers “the information from Hoffman’s perspective, there is certainly can be of great value.” some evidence of this. He says that a Palamon Central to Siming’s findings is that funds that PE firms can partner, with extensive investment banking Private Equity hire personnel from banks are far more likely to get access to experience from his native Sweden, has kept in do business with those team members’ former touch with ex-employers and sees a “good flow employers. His results show how significant this from hiring of business from them”. Eli Talmor, Florin Vasvari correlation is. The likelihood of an adviser Even if networks act as a conduit for new running a deal, either on the buy- or sell-side, ex-investment deals – and subsequently lead to private equity where an alumni lineage exists is increased from bankers can be firms being more likely to be invited to join 3.6% to 6.4%: the probability is nearly doubled. auctions – that is not to say other forces cannot Written from a unique joint practitioner When the time comes to sell up and return of great value” be more influential. Investment banks’ ability to and academic perspective by renowned money to investors, these networks, at the very Linus Siming, Bocconi University advance debt on deals – and offer suitable experts in the field, International Private least, grease the wheels. However, some are assets in the first place – should take Equity is designed to be truly international doubtful as to whether contracts get signed on precedence. “Gone are the days of deals flushed the back of lineage. “If people are respectful of with liquidity,” says Anwar. “Today, the ability of a in focus, with examples and case studies the places they have worked, they like the idea financial adviser to show good strategic deals drawn from Europe, the Middle East, of feeding business back to those groups where buy-side, you’re with the client organisation. In and a balance sheet strong enough to provide Africa and Asia, and from a wide range of they cut their teeth, where they can,” says my experience, the client side would cast the leverage for deals is an important differentiator.” Palamon Capital Partners co-founder Michael net wide when it wants to use a financial Yet – and this is where the research gets business sectors. The case studies, taken Hoffman. “But the decision of who you employ adviser, instead of necessarily going back to a controversial – Siming finds that a PE firm is from the collection of the London Business to find or sell your businesses, particularly the former employer.” more likely to win an auction where an alumni School’s prestigious Coller Institute of latter, tends to be objective, often involving a Nonetheless, Anwar accepts that a link nexus exists. But Anwar rejects these findings. Private Equity, are used to exemplify and beauty parade and competitive process.” The between PE houses and advisers, traced via “The decision to award a particular deal to a fact that an alumnus is ‘inside the tent’ employees, fosters an understanding of each winning bidder is ultimately the management’s illustrate all stages of the private equity influences who is invited to the table, but doesn’t other’s needs. When it comes to exits, it helps decision, not the financial adviser’s,” he says. “If deal process. have an impact on the outcome. funds recognise what the adviser can offer, how the price is lower than what the seller is This objectivity is also expected from the it can support valuations and whether it’s expecting, or the strategic value-add is lower This unprecedented access to the Coller other side of the fence, explains Kamran Anwar, equipped for rigorous due diligence. than what the seller is expecting, I don’t see the Institute’s collection of case studies, head of private equity and real estate services But what of the buy-side? Siming finds that deal being awarded to the firm just because it combined with comprehensive and timely at Citigroup. “If you move from an investment alumni networks impact deal sourcing, too: has a relationship with the financial adviser.” bank to a PE house, you have moved to the a PE firm is more likely to be invited to However, he does grant that such relationships coverage of this important topic, makes could benefit from lower success fees, more International Private Equity an indispensible attractive retainers or a better level of service. guide for students and practitioners alike. Even Siming, who anticipated collegial The research information sharing, was surprised to find these networks increase the probability of winning at auction. “I was expecting to find that investment For Your Former Employees Matter: On average, the unconditional bankers give business to their former employees. Praise for International Private Equity… Private Equity Firms and Their probability of winning a financial As for the second part – the fact that private Financial Advisors, Linus Siming adviser mandate increases from equity firms can win auctions through these collected data on the work history of 3.6% to 6.4% if a former employee of networks – I didn’t expect that correlation to be “Professors Talmor and Vasvari combine academic rigor and real world cutting edge 1,326 private equity professionals the financial adviser is among those so strong.” involved in 1,285 transactions. He private equity professionals who It is still not clear what exact mechanism leads experience to provide an insightful and detailed description of private equity today. studied how labour market transitions constitute the deal team for that to winning bids. Siming’s work speculates that This is a most valuable contribution to academia, the industry, and to business in general.” when financial advisers are matched with former from investment banks to private equity particular transaction. - Henry R. Kravis, Co-Chairman and Co-CEO, Kohlberg, Kravis Roberts firms affect advisory appointments and PE firms have a 19 percentage point employees, they negotiate better deals and manage to convince sellers to divest businesses inclusion in corporate acquisition higher probability of being included in at attractive prices. Now he is working to uncover auction processes. an auction bidding process (and what is going on behind the scenes and reveal The study found that the social therefore gaining valuable information whether these networks affect capital gains or networks that arise from these moves and data) and a 13.5 percentage point losses. For now, private equity firms should take affect PE firms’ choice of advisers and higher probability of winning the heed and, where they can, “use alumni 9780470971703 • Hardback • 764 pages • April 2011 • £44.99 / €54.00 / $75.00 increase their chances of winning auction where a previous-employment networks more, but also keep track of their auctions run by former employees. network exists. competitors,” he says.

24 | FINDINGS | WINTER 2011 Coller institute of private equity news

Event Calendar 4th Annual Private Equity Research Update Coller Prize Competition Findings Symposium RECENT EVENTS As a research centre and forum for debate in the field of private equity, q Venture Philanthropy and Social the Coller Institute is committed to producing world-class academic The Institute hosted the Coller Prize awards evening on Ventures – 15 September 2011 research and disseminating the findings to a broader non-academic 2 November. The Coller Prize recognises the best This event featured a prestigious panel including: Daniela Barone audience. Our research agenda continues to thrive. achievements in student research in PE and VC. We were Soares, Impetus Trust; Sir Ronald Cohen, The Portland Trust and Francesca Cornelli, academic director of the Institute, has been very proud to have Tim Parker, industrial partner at CVC Bridges Ventures; Johannes Huth, KKR; David Hutchison, Social working on a paper with Capital Dynamics on the question of team Capital Partners, as our keynote speaker for the evening. Finance; and Gary Dushnitsky, London Business School. It examined stability. While many PE firms choose to highlight the stability of their The event included the PhD category, which is open to the emerging models of social investment, how to manage such investment team as a key characteristic, this conventional wisdom students globally. This year, submissions were received investments professionally and how to measure social returns. See has yet to be tested by an independent study. The study attempts to from 18 academic institutions, a great result considering www.collerinstitute.com for a blog on the event. empirically test how team turnover relates to performance, whether the PhD prize is only in its second year. Academic papers turnover of individuals with different backgrounds has a differential explored topics ranging from macroeconomic policies to q MasterClass in Private Equity, effect on performance and whether GPs react to changing economic promote VCs to factors influencing the premium paid by Johannesburg – 5 October 2011 conditions. Watch this space for the results. strategic investors to governance structures in PE. The South African Venture Capital and Private Equity Association Eli Talmor, chairman of the Institute, and Florin Vasvari, London This year’s PhD category was won by Shai Bernstein (SAVCA) and the Coller Institute of Private Equity jointly hosted the masterclass in Johannesburg, presented by the Institute’s chairman, Business School, worked on a pioneering paper on the PE secondaries of Harvard University for Do Equity Markets Affect Professor Eli Talmor. Professor Talmor was the keynote speaker at market, an increasingly important area for investors to liquidate their Innovation? Evidence from Initial Public Offerings. the SAVCA annual meeting, where he presented his research on exposure to PE. Drivers of Liquidity in the Secondaries Private Equity Bernstein’s paper looks at whether companies that secondaries. With Africa being the world’s third fastest-growing region Market examines the determinants of liquidity of PE fund interests go public become less innovative after the IPO, using since 2000, the future for private equity there is promising. This was an sold in the secondaries market and assesses the impact of liquidity on some creative methodologies to adjust for the fact that important event in the context of the Institute’s ambition to expand our pricing. Among other things, the paper finds that a PE fund interest companies tend to go public after a major innovation. He reach to the world’s growth markets. is more liquid if the fund is larger, focused on buyouts, has a lower looks specifically at VC-backed firms that go public. amount of undrawn capital, lower distributions and is managed by a The runner-up in the PhD category was Vineet Bhagwat q Coller Prize in Private Equity – 2 November 2011 GP whose funds were previously on the secondaries market. This paper of Northwestern University for Manager Networks and The Institute awards an annual prize for student research in private was presented by Professor Vasvari at our 2011 symposium and is Success of Venture Capital Syndications. This paper equity and venture capital, including a prize for the best research by the US housing market and its available for download at www.collerinstitute.com. examines the role of educational ties in VC syndication PhD students from around the world. Please see facing page for a relationship to the PE industry, Professors Talmor and Vasvari completed a follow-up to their paper on partnership and early stage investment. write-up of the event. while Tett analysed whether the return attribution in private equity with another study in collaboration with The Masters Prize continues to be extremely crisis will cause a financial reset. the BVCA, entitled Replicating the Investment Strategy of Buyout Funds competitive. This year, submissions covered a diverse q Team Stability and Performance in Private Equity This was followed by a panel Based in the United Kingdom (UK) with Public-Market-Investments. The range of topics and scenarios including best practices in – 3 November 2011 discussion between two GPs and paper concludes that buyout funds show higher returns than the public deal origination, a fundraising in West Africa, an alliance The Coller Institute and Capital Dynamics jointly hosted a media two LPs on value creation and market equivalent portfolio. A copy can be downloaded from our website. between a corporate and a PE fund, and the structuring briefing on new research on team stability (see Research Update). realisation in the new normal. The Other faculty members researching the PE industry include and managing of external technology investments. focus then turned to anticipated Chris Higson, who is finalising a piece on PE performance, and Crispin Payne, partner at Coller Capital, presented q MVision RoundTable “Performance Beyond Past IRR” – 1 December 2011 regulatory measures (eg AIFM, Gary Dushnitsky, who is continuing his research on the corporate the winner’s prize to Lode Van Laere and Matthias Dodd-Frank, Basel III) and how PE venture capital market. See our website for news and updates. Vandepitte for SunRay Renewable Energy, Private Equity This event looked at the imprecise science of performance measurement and benchmarking in PE. The panel included: Carol is dealing with increased scrutiny. in the Sunshine. This case study recounts the story of the Kennedy, Pantheon Ventures; Rob Thielen, Waterland Private Equity The symposium is the Coller Nader Tavassoli, London Business spectacular growth of SunRay, an entrepreneurial venture Institute of Private Equity’s School, presented day one’s final focused on solar energy projects. Since its foundation, the Investments; Oliver Gottschalg, HEC Paris; and Eli Talmor, Coller Findings shortlisted for two Institute of Private Equity. flagship event, convening keynote speech, discussing the firm attracted the interest of private equity firm senior practitioners and leading importance of brand value in international awards Denham Capital and was subsequently bought out UPCOMING EVENTS academics from around the world private equity across all stages Findings has been nominated for two international by Sunpower, an international supplier of solar power to debate critical issues. This year’s including fundraising, recruitment publishing awards. It is one of four titles shortlisted for ‘Best technology, for a sum of almost $300m only three years q Private Equity Findings Symposium – event was a great success, with a and dealing with regulators. The not-for-profit publication’ at the CorpComms Awards and after the company was founded. 28–29 May 2012 lively debate on the theme “Private day ended with a discussion of one of five shortlisted for ‘Best public sector/government The runner-up prize went to Marina Blinova and Speakers confirmed to date are:Lynda Gratton, London Business Equity: The New Normal”. investment in emerging markets, title’ at the APA International Content Marketing Awards. Yervand Sarkisyan for Alliance of a Corporate with School; Alexander Ljungqvist, NYU Stern; and Edmund Truell, Day one kicked off with keynote their prospects and pitfalls. Hans Holmen, executive director of the Coller Institute, a Private Equity Fund. This paper studies a highly Pension Corporation. speeches by Viral Acharya Day two saw the presentation of said: “Two years ago we set out to create a completely new innovative JV, which involves a private equity firm and (above), NYU Stern, and Gillian eight research papers by academics, type of publication for the private equity industry. We are a financially constrained corporate working together q Angel Investment – Winter 2012 Tett, Financial Times, on broader exploring topics ranging from drivers immensely proud of Findings and delighted that the reach on acquisition opportunities. This event will examine models of investment in start-up economic issues affecting private of liquidity in the PE secondaries and influence of the title has been recognised with these Thanks to Katharine Campbell, Cambridge Associates, enterprises, comparing differences between angel investors and equity. Professor Acharya presented market to the role of PE in resolving award nominations.” for her assistance in judging the Masters Prize. venture capitalists. on the boom and bust cycles in financing distress.

26 | FINDINGS | WINTER 2011 WINTER 2011 | FINDINGS | 27 We hope you have found this issue of Private Equity Findings enlightening. Please take a moment to share your views with us at : www.collerinstitute.com/Feedback.

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