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5 years ago

* I would like to thank Frank Dobbin, Christopher Marquis, Peter ...

* I would like to thank Frank Dobbin, Christopher Marquis, Peter ...

issuer’s business

issuer’s business relations. The practice of forcing companies to borrow against their assets and future income to pay shareholders is often referred to as “leveraged recapitalization.” Examples of private equity firms espousing an Income logic include LBO firms such as Texas Pacific Group and Kohlberg Kravis Roberts (for a description of the emergence of the LBO industry from fringe actors within the broader socio-political context of the 1980’s merger wave, see Stearns and Allan 1996). In contrast, Growth investors view companies as a nexus of business partners and relationships (perception) that can generate long-term business growth and hence equity returns (belief), and accordingly focus on long-term strategic planning and exploiting business partnerships. Examples of Growth investors include venture capital firms and such large private equity investors like General Atlantic and Warburg Pincus. While the private equity industry exhibits both institutional logics, the venture capital industry is dominated by the Growth logic given the early-stage nature of its investments, when most companies lack stable near-term income. Thus, rational adaptation could explain the emergence of these institutional logics since narrowly viewing early stage companies without revenues or income as streams of cash is farfetched. Importantly, both Income and Growth investors are focused on maximizing time-weighted returns. The private equity and venture capital industries are highly competitive, especially with regard to raising capital from limited partners. These limited partners focus strictly on performance as measured by internal rate of returns (IRRs, equivalent to the discount rate in DPV calculations) net of fees and carried interest (generally 2 percent of funds under management and 20 percent of investment gains generated). IRRs increase with increased investment gains and decreased investment period. 15 Hence, the difference in ontological 18

perceptions of companies is not a difference between short and long-term investment horizons. As both groups of investors are focused on maximizing IRRs, any increase in investment holding period requires an increase in investment gains to offset the decrease to IRRs. Critically, the perception of companies as growth vehicles when combined with the acceptance of DPV intrinsic values as rational could lead Growth investors to believe that improving the growth prospects of their companies (future value) will increase their near-term valuations (DPV). Growth investors focus on long-term strategy and business growth not because they are long- term investors, but because they believe that is the best way to increase the present value of their investments. Nothing about the differing logics necessitates or suggests that Growth investors would hold onto investments longer than Income investors; instead, differing ontological perceptions of companies drives differing methods of generating maximum investment gains in the shortest time period possible (leveraged recapitalization generating near-term cash for Income investors and business growth generating near-term increases in DPV intrinsic value for Growth investors). 16 Figure 2 details the compositional breakdown of issuers by shareholding, control, and logics. Of the 813 operating company IPOs over the past ten years, institutional private investors controlled 58 percent of all issuers (control defined by the shareholding group holding the largest block of voting shares). Of these 470 issuers, private equity and venture capital firms controlled 281 (60 percent) and 189 (40 percent), respectively. Based on my operationalization (as discussed in the “Data and Methods” section), over one-third of the 281 private equity controlled issuers espoused a Growth institutional logic (95 versus 186 Income). Including venture capital firms, Growth and Income logics accounted for 284 and 186, respectively, of the 813 IPOs. 19

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