Subject: NBER Conference Announcement and Call for Papers, "The New World of Private Equity"
From: Rob Shannon (rshannon@nber.org)
Date: Fri Jan 19 2007 - 14:29:13 EST
CONFERENCE ANNOUNCEMENT
The New World of Private Equity
National Bureau of Economic Research
Josh Lerner and Per Strömberg, Organizers
Introduction:
This conference is motivated by the unprecedented activity in private
equity in the last few years. 2006 has seen records set for the amounts of
aggregate fundraising and investment activity, as well as for the size of
the individual funds raised and individual buyout transactions
undertaken. According to a July 2006 estimate by Private Equity
Intelligence, investors have allocated more than $1.3 trillion globally to
private equity funds (including funds not yet committed). These
investments are having a profound effect in spurring entrepreneurship and
restructuring in many industries worldwide.
At the same time, the rapid growth and globalization of the industry has
worried policy makers and raised demands for increased regulation and
disclosure of this sector. To cite a few recent examples:
· Franz Müntefering, the head of the Social Democratic Party (and
today the Vice Chancellor of Germany), attacked private equity groups and
hedge funds, describing them as "swarms of locusts that fall on companies,
stripping them bare before moving on".
· Korean authorities, angered at the profits that private equity
groups have made from their investments there, indicted the Lone Star Funds
on charges of stock manipulation.
· The U.S. Department of Justice launched a probe of allegedly
anti-competitive behavior by at least five private equity groups and one
investment bank, focusing on "clubbing" or syndicated transactions.
· Britain's Financial Services Authority announced that it was
increasing its scrutiny of private equity firms and the banks that deal
with them because it feared the collapse of a large buy-out was now
"inevitable". Among the problems or risks that attributed to private equity
were conflicts of interest, a reduction of the efficiency of capital
markets, the opaqueness of the groups' operations, and the abuse of inside
information.
Despite this fervent activity, most of the academic research on private
equity markets was undertaken as a result of the previous leveraged buyout
(LBO) wave of the 1980s. To be sure, this research effort yielded several
important insights that are still very relevant today, for example
documenting the effects of buyouts on firm performance, the organizational
consequences of management buyouts, the impact of LBOs on product market
competition, the potential costs of excess leverage, and the role of the
junk bond market for buyout activity.
But we believe there is an urgent need to revisit given the relative
scarcity of private equity and buyout research in the last ten
years. Although some of the insights from the 1980s wave can be
generalized, the new world of private equity is arguably very different:
· First, the types of firms that are acquired by private equity
funds look different. The typical buyout transaction is no longer a
(hostile) takeover of a publicly traded company but rather a friendly
acquisition, often of a division of a public company by means of an
auction. Moreover, LBOs are no longer confined to mature, stable,
non-technology businesses, but are spreading across all types of industries
and growth stages.
· Second, the way buyout funds work to add value in their portfolio
companies have changed. The value-added is arguably less from financial
engineering and leverage and more from operating strategy of the company.
Acquisitions are becoming as important as divestments in the corporate
restructuring activities of buyout funds.
· Third, a new industrial organization has emerged in the private
equity fund business, which is not yet well understood. There are now
different market segments, including small, middle-market, and mega fund
players, who are increasingly trading companies among each other. Such
"secondary buyouts" have overtaken IPOs in popularity as an exit route. As
a result, firms seem to remain in private equity fund ownership for longer
and longer.
· Fourth, the markets for buyout debt have seen substantial
financial innovations in the last ten years. Due to the emergence of new
instruments, such as credit default swaps and collateralized debt
obligations, low-grade debt markets are becoming increasingly liquid, and
traditional debt investors such as banks and insurance companies are being
replaced by hedge funds.
· Fifth, the scope of the private equity market has broadened
considerably. Private equity is going global, and the U.S. private equity
structures are copied and adopted in new countries and contexts. Private
equity-like investment structures are being adopted by new asset classes,
such as real estate, and infrastructure. In parallel, other new types of
investors, such as hedge funds, are going into private equity investment.
Plan for the Conference:
The NBER's Entrepreneurship Working Group and Corporate Finance Group will
be sponsoring a conference to examine these issues. The conference is
supported by the Erwin M. Kauffman Foundation.
In addition to bringing together a set of leading researchers from
different backgrounds and stimulating the production of high-quality
papers, it is hoped that this conference will have a longer-run impact in
that it will stimulate future research in these topics by illustrating the
challenging research issues that they pose. Since lack of data is a key
problem in private equity research, it is anticipated that many of the
papers will have a component of field research or the development of new
datasets in addition to more traditional empirical or theoretical analyses.
Also, we will encourage participation not only from corporate finance
researchers, but from asset pricing researchers, economists more broadly,
legal scholars, and sociologists interested in the private equity
phenomenon. Some of the most interesting research done in the past has
included organizational economics, strategy, and also been in the form of
field work or clinical studies.
Among the questions that we anticipate will be covered are:
· Economic effects of private equity investing on entrepreneurs and
industries.
· How do private equity funds add value?
· What is the impact of private equity on entry of new firms and
product market competition?
· Interplay between the private equity market and other markets,
such as the public equity market, the debt market, and the managerial labor
market.
· Understanding the organizational form of private equity investors.
What is special about the private equity partnership model?
· To what extent is the private equity investment model to other
institutional environments and asset classes?
· What are the returns to private equity investing? How should
leverage and opportunistic behavior taken into account in fund performance
measurement?
· The industrial organization of the private equity market. How do
new firms enter the market and get established? How do entrepreneurial
private equity groups
compete and cooperate with each other?
Timing:
The plan for the conference is as follows: Proposals (the more detailed,
the better) should be sent to Rob Shannon at rshannon@nber.org by March 1,
2007. The selected authors will be informed by April 1, 2007. A
pre-conference will be held in Cambridge, on October 5, 2007, in which
preliminary drafts of papers will be discussed. The conference will be
held in the first quarter of 2008.
The papers from this conference will be published as NBER working papers
and on a dedicated conference web site. Authors will be free to submit
their paper for publication at an outlet of their choosing. Each author (or
set of authors) will receive an honorarium of $7,500
If there are questions regarding the substance of the conference, the
contacts for the organizers are:
Josh Lerner
Harvard Business School
(617) 495-6065 (phone)
josh@hbs.edu
Per Strömberg
Swedish Institute for Financial Research
(+46) 8-728-5128 (phone)
Per.stromberg@sifr.org
