The Global Economic Impact of Private Equity Report 2008 - World ...

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ReferencesAxelson, U., T. Jenkinson, P. Strömberg, and M. Weisbach(2007), “Leverage and pricing in buyouts: An empiricalanalysis”, Working Paper.Baker, G., and K. Wruck (1989), “Organizational changes andvalue creation in leveraged buyouts: The case of O.M. Scott &Sons Company”, Journal of Financial Economics 25, 163–190.Ben-Ameur, H., B. Hind, P. Roustan, R. Théoret, and S. Trablesi(2005), “Assessing bankrupt probability on American firms:A logistic approach”, Working Paper, University of Montreal.Cao, J., and J. Lerner (2006), “The performance of reverseleveraged buyouts,” Working Paper, Harvard Business School.Cotter, J.F., and S.W. Peck (2001), “The structure of debtand active equity investors: The case of the buyoutspecialist”, Journal of Financial Economics 59, 101–147.Davis, S., J. Haltiwanger, R. Jarmin, J. Lerner, and J. Miranda(2008), “Private Equity and Employment”, in AnuradhaGurung and Josh Lerner (eds.), Globalization of AlternativeInvestments Working Papers Volume 1: Global EconomicImpact of Private Equity 2008, New York, World EconomicForum USA.Gompers, P., and J. Lerner (2000), “Money Chasing Deals?The Impact of Fund Inflows of Private Equity Valuation”,Journal of Financial Economics 55, 281–325.Guo, S., E. Hotchkiss, and W. Song (2007), “Do Buyouts(Still) Create Value?”, Working Paper, Boston College.Hamilton, D., P. Varma, S. Ou, and R. Cantor (2006),“Default and recovery rates of corporate bond issuers,1920–2005”, Special Comment, Moody’s InvestorsService Global Credit Research.Heckman, J. (1979), “Sample selection bias asspecification error”, Econometrica 47, 153–162.Jensen, Michael C. (1989) “The Eclipse of the PublicCorporation,” Harvard Business Review 67, 61–74.Kaplan, S.N. (1989a), “Management Buyouts: Evidence ofTaxes as a Source of Value”, Journal of Finance 44, 611–632.Kaplan, S.N. (1989b), “The Effects of Management Buyoutson Operating Performance and Value”, Journal of FinancialEconomics 24, 217–254.Kaplan, S.N. (1989c), “Campeau’s acquisition of Federated:Value destroyed or value added?”, Journal of FinancialEconomics 25, 191–212.Kaplan, S.N. (1991), “The staying power of leveragedbuyouts”, Journal of Financial Economics 29, 287–313.Kaplan, S.N. (1997), “The evolution of US corporategovernance: We are all Henry Kravis now,” Journal ofPrivate Equity, Fall, 7–14.Kaplan, S.N., and A. Schoar (2005), “Private equityperformance: Returns, persistence and capital flows”,Journal of Finance 60, 1791–1823.Kaplan, S.N., and J. Stein (1993), “The Evolution of BuyoutPricing and Financial Structure in the 1980s”, QuarterlyJournal of Economics 108, 313–357.Kaplan, S.N., and P. Strömberg (2003), “FinancialContracting Theory Meets the Real World: Evidence fromVenture Capital Contracts”, Review of Economic Studies 70,281–315.King, R., and R. Levine (1993), “Finance and growth:Schumpeter might be right”, Quarterly Journal of Economics108, 717–738.LaPorta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny(1998), “Law and finance”, Journal of Political Economy 106,1113–1155.Lehn, K., and A. Poulsen (1989), “Free cash flow andstockholder gains in going-private transactions”, Journalof Finance 44(3), 771–787.Lerner, J., M. Sørensen, and P. Strömberg (2007), “PrivateEquity and Long-Run Investment: The Case of Innovation”,Working Paper.Ljungqvist, A., M. Richardson, and D. Wolfenzon (2007),“The Investment Behavior of Buyout Funds: Theory andEvidence”, ECGI Working Paper no. 174/2007.Long, W.F., and D.J. Ravenscraft (1993), “LBOs, debt, andR&D intensity”, Strategic Management Journal 14, 119–135.Muscarella, C.J., and M.R. Vetsuypens (1990), “Efficiencyand Organizational Structure: A Study of Reverse LBOs”,Journal of Financial Economics 45, 1389–1413.Rappaport, A. (1990), “The staying power of the publiccorporation”, Harvard Business Review 1, 96–104.Renneboog, L., and T. Simons (2005), “Public-to-privatetransactions: LBOs, MBOs, MBIs, and IBOs”, FinanceWorking Paper no. 94/2005, European CorporateGovernance Institute.Wright, M., L. Renneboog, T. Simons, and L. Scholes (2006),“Leveraged buyouts in the UK and Continental Europe:Retrospect and prospect”, Finance Working Paper no.126/2006, European Corporate Governance Institute.26 Large-sample studies: DemographyThe Global Economic Impact of Private Equity Report 2008
Private equity and long-run investment: the case of innovation*Josh LernerHarvard Business School and NBERPer StrömbergStockholm Institute for Financial Research and NBERmorten sØrensenUniversity of Chicago Graduate School of Business,NBER and SIFR1. IntroductionIn his influential 1989 paper, “The Eclipse of the PublicCorporation”, Michael Jensen predicted that the leveragedbuyout (LBO) would emerge as the dominant corporateorganization form. With its emphasis on corporategovernance, concentrated ownership by active owners,strong managerial incentives and efficient capital structure,he argued, the buyout was superior to the public corporationwith its dispersed shareholders and weak governance.The paper argued that these features enabled managersto proceed without the pressure of catering to the market’sdemands for steadily growing quarterly profits, which Stein(1988) and others argue can lead to firms myopicallysacrificing long‐run investments.These claims excited much debate in the subsequent years.Critics have questioned the extent to which private equitycreates value, suggesting that funds’ profits are insteaddriven by favourable tax treatment of corporate debt,inducing senior executives of publicly traded firms intoaccepting deals that go against the interests of shareholdersor abrogating explicit and implicit contracts with workers(e.g. Shleifer and Summers 1988). Moreover, these criticsquestion whether private equity‐backed firms take alonger‐run perspective than their public peers. They point topractices such as special dividends to equity investors and“quick flips” – that is, initial public offerings (IPOs) of firmssoon after a private equity investment – which enable privateequity groups to generate fees and raise new funds morequickly. Sceptics argue that given their incentives toundertake and exit deals, private equity investors arealso likely to take steps that boost short‐run performanceat the expense of sustained corporate growth.In this paper, we examine one form of long‐run investment:investments in innovative activities. This arena is an attractivetesting ground of the issues delineated above for four reasons:1. These expenditures have the classic features of a long‐runinvestment: the costs associated with generatinginnovations must be expensed immediately by firms,yet the benefits are unlikely to be observed for severalyears thereafter. As a result, a number of studies ofmanagerial “myopia” have examined R&D expenditures(e.g. Meulbroek et al 1990).2. An extensive body of work in the economics oftechnological change has documented that thecharacteristics of patents can be used to assess thenature of firms’ technological innovation. While thisliterature acknowledges that these are not a perfectmeasurement of innovation – many inventions areinstead protected as trade secrets – the value of patentsas a measure of innovative activities is widely accepted(e.g. Griliches 1990, Jaffe and Trajtenberg 2002).3. Unlike many other measures, patents are observable forboth public and privately‐held firms, which is importantwhen studying private equity transactions.4. Finally, innovation is important. Economists haveunderstood that technological innovation is criticalto economic growth since the pioneering work ofAbramowitz (1956) and Solow (1957). At the same time,not all research expenditures are well spent: critics ofmajor corporations (e.g. Jensen 1993) have suggestedthat many corporate research expenditures have beenwasteful and yielded a low return.We examine the impact of private equity investmenton the patenting behaviour of 495 firms with at least onesuccessful patent application filed from three years beforeto five years after a later‐stage private equity investment. 1We find that:• Firms pursue more economically important innovations,as measured by patent citations, in the years after privateequity investments. This pattern is robust to a variety ofspecifications and controls* Harvard Business School and National Bureau of Economic Research; University of Chicago Graduate School of Business, NBER, and SIFR; andStockholm Institute for Financial Research and NBER. We thank Geraldine Kim, Jodi Krakower, Sanjey Sivanesan, and especially Sarah Woolvertonfor assistance with this project. The World Economic Forum and Harvard Business School’s Division of Research provided financial support for thisresearch. We thank for helpful comments from participants in the World Economic Forum’s “Global Economic Impact of Private Equity” project andin a seminar at the London School of Economics, especially Mark Schankerman and John van Reenen. All errors and omissions are our own.1Throughout this paper, when we refer to private equity transactions, we are referring to equity investments by professionally managed partnershipsthat involve leveraged buyouts or other equity investments with a substantial amount of associated indebtedness.The Global Economic Impact of Private Equity Report 2008 Large-sample studies: Long-run investment 27
Page 2 and 3: The Globalization of Alternative In
Page 5: ContributorsCo-editorsAnuradha Guru
Page 9 and 10: PrefaceKevin SteinbergChief Operati
Page 11 and 12: Letter on behalf of the Advisory Bo
Page 13 and 14: Executive summaryJosh lernerHarvard
Page 15 and 16: • Private equity-backed companies
Page 17 and 18: C. Indian casesThe two India cases,
Page 19 and 20: Part 1Large-sample studiesThe Globa
Page 21 and 22: The new demography of private equit
Page 23 and 24: among US publicly traded firms, it
Page 25 and 26: should be fairly complete. While th
Page 27 and 28: according to Moody’s (Hamilton et
Page 29 and 30: draining public markets of firms. I
Page 31 and 32: FIguresFigure 1A: LBO transactions
Page 33 and 34: TablesTable 1: Capital IQ 1980s cov
Page 35 and 36: Table 2: Magnitude and growth of LB
Page 37 and 38: Table 4: Exits of individual LBO tr
Page 39 and 40: Table 6: Determinants of exit succe
Page 41 and 42: Table 7: Ultimate staying power of
Page 43: Appendix 1: Imputed enterprise valu
Page 47 and 48: alternative names associated with t
Page 49 and 50: 4. Finally, we explore whether firm
Page 51 and 52: When we estimate these regressions,
Page 53 and 54: cutting back on the number of filin
Page 55 and 56: Table 1: Summary statisticsPanel D:
Page 57 and 58: Table 4: Relative citation intensit
Page 59 and 60: figuresFigure 1: Number of private
Page 61 and 62: Private equity and employment*steve
Page 63 and 64: Especially when taken together, our
Page 65 and 66: centred on the transaction year ide
Page 67 and 68: and Vartia 1985.) Aggregate employm
Page 69 and 70: sectors. In Retail Trade, the cumul
Page 71 and 72: employment-weighted acquisition rat
Page 73 and 74: FIguresFigure 1: Matches of private
Page 75 and 76: Figure 6:Figure 6A: Comparison of n
Page 77 and 78: Figure 8:Figure 8A: Comparison of j
Page 79 and 80: Figure 11: Variation in impact in e
Page 81 and 82: Figure 12: Differences in impact on
Page 83 and 84: Private equity and corporate govern
Page 85 and 86: et al (2007) track the evolution of
Page 87 and 88: groups aim to improve firm performa
Page 89 and 90: distribution of the LBO sponsors, m
Page 91 and 92: the most difficult cases. This stor
Page 93 and 94: to see whether these changes of CEO
Page 95 and 96:
Figure 3:This figure represents the
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TablesTable 1: Company size descrip
Page 99 and 100:
Table 5: Changes in the board size,
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Table 7: Board turnoverPanel A: Siz
Page 103 and 104:
Part 2Case studiesThe Global Econom
Page 105 and 106:
European private equity cases: intr
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Exhibit 1: Private equity fund size
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Messer Griesheimann-kristin achleit
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ealized it was not possible to grow
Page 113 and 114:
The deal with Allianz Capital partn
Page 115 and 116:
the deal, the private equity invest
Page 117 and 118:
Exhibit 1: The Messer Griesheim dea
Page 119 and 120:
Exhibit 5: Post buyout structureMes
Page 121 and 122:
New Lookann-kristin achleitnerTechn
Page 123 and 124:
feet. This restricted store space w
Page 125 and 126:
institutional investors why this in
Page 127 and 128:
Although a public listing did not a
Page 129 and 130:
Exhibit 5: Employment development a
Page 131 and 132:
Chinese private equity cases: intro
Page 133 and 134:
Hony Capital and China Glass Holdin
Page 135 and 136:
Hony’s Chinese name means ambitio
Page 137 and 138:
Establishing early agreement on pos
Page 139 and 140:
Executing the IPOEach of the initia
Page 141 and 142:
Exhibit 1A: Summary of Hony Capital
Page 143 and 144:
Exhibit 4: Members of the China Gla
Page 145 and 146:
Exhibit 6A: China Glass post‐acqu
Page 147 and 148:
Exhibit 8: China Glass stock price
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3i Group plc and Little Sheep*Lily
Page 151 and 152:
y an aggressive franchise strategy,
Page 153 and 154:
soul” of the business. But there
Page 155 and 156:
Exhibit 1: Summary information on 3
Page 157 and 158:
Exhibit 6: An excerpt from the 180-
Page 159 and 160:
Indian private equity cases: introd
Page 161 and 162:
ICICI Venture and Subhiksha *Lily F
Page 163 and 164:
investment,” recalled Deshpande.
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2005 - 2007: Moderator, protector a
Page 167 and 168:
Exhibit 3: Subhiksha’s board comp
Page 169 and 170:
Warburg Pincus and Bharti Tele‐Ve
Page 171 and 172:
founded two companies at this time
Page 173 and 174:
By 2003 this restructuring task was
Page 175 and 176:
Exhibit 1C: Private equity investme
Page 177 and 178:
Exhibit 4B: Bharti cellular footpri
Page 179 and 180:
Exhibit 6: Summary of Bharti’s fi
Page 181 and 182:
Exhibit 7: Bharti’s board structu
Page 183 and 184:
In the 1993‐94 academic year, he
Page 185 and 186:
consumer products. She was also a R
Page 187 and 188:
AcknowledgementsJosh LernerHarvard
Page 189:
The World Economic Forum is an inde
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