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Private equity and venture capital funds—from the state of research to a comprehensive model and an interdisciplinary research outlook

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Abstract

In the following article I not only aim at giving a comprehensive overview, but at integrating contemporary research on PE into a comprehensive model of PE investment. In doing so, I point out new avenues for future research and the methodological challenges. Finally, I attempt to look at the opportunities for interdisciplinary knowledge transfer to strategic management (SM) and international business (IB) research. I argue that the lessons of PE research offer a unique opportunity to (re)discover the “liabilities side” of strategy and international business.

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Notes

  1. In the following article I use the term PE for institutional private equity funds only. As such it does not include investment by private individuals.

  2. Previous literature reviews were mostly descriptive and concentrated on impact related PE studies (e.g. Peneder 2006; Lutz and Achleitner 2009; Strömberg 2009; Wood and Wright 2009; Wright et al. 2009b), on early stage VC or leveraged buyouts (e.g. St-Pierre et al. 2003; Landström 2007; Siegel et al. 2011), or solely on Anglo-American literature (e.g. Wright and Robbie 1998; Wright and Gilligan 2010; Metrick and Yasuda 2011).

  3. The only comparable attempt familiar to the author was prominently made by Wright et al. (2009a), who explicitly stressed the need include “other theoretical explanations of PE-backed buyouts.” (Wright et al. 2009a, p. 371). In another paper, Wood and Wright (2009, p. 375) mention the financialization approach as an alternative to the governance dominance in PE research.

  4. One study which explicitly considers the double-sided agency relationship is by Houben (2002).

  5. A comprehensive market overview of PE demography is provided by Strömberg (2008) and Friedman (2010). Berger and Udell (1998) provide an excellent review of the life-cycle of companies and the different sources of finance used therein.

  6. This regional disparity is also evidenced in the naming of the official US interest group “National Venture Capital Association” (NVCA 2010). In this article I adhere to the European understanding of PE as the umbrella term which comprises the early stage VC segment as a subset.

  7. The article was later picked up and counter stated by Rappaport (1990).

  8. Although Jensen himself spoke of active investors like LBO partnerships at the time (Jensen 1989, p. 65).

  9. Strictly speaking the fund is only a special purpose company managed by the GP. For simplicity reasons I will not make this distinction throughout the article.

  10. In addition to the contractual covenants regulating the management company’s investment decision, PE funds are usually supervised by an independent investment committee (Zahradnik 2003, p. 419).

  11. They simulate that on average two thirds of the GP revenue stems from such fixed income components.

  12. Accordingly, PE funds are sometimes classified as captive or independent funds (e.g. Tykvová 2006; Bottazzi et al. 2008).

  13. Such strategies relate, for example, to due diligence, diversification, monitoring, involvement and syndication.

  14. Pecking order theory predicts that PFCs will only revert to costly PE finance after they have exhausted cheaper means of finance (Myers and Majluf 1984, p. 207). As a result, PE and traditional finance are not perfectly substitutable but complementary instruments. Due to this complementarity any regulatory intervention potentially changes the equilibrium and potentially leads to crowding out effects (e.g. Leleux and Surlemont 2003; European Commission 2005; Cumming and MacIntosh 2006; Peneder et al. 2006, p. 66).

  15. Specialization usually relates to certain industries, regions or types of investments.

  16. On the 11th of November 2010 the European Parliament (2010) introduced the Alternative Fund Managers Directive (AIFMD) limiting PE funds legal room of maneuver in asset stripping.

  17. Shepherd et al. (2003) have found interesting evidence that PE experience may not necessarily improve decision making. The reason for this negative learning effect is a tendency towards overgeneralization, oversimplification and overfitting.

  18. Accordingly, funds are often grouped into hands-on and hands-off investors (e.g. Sweeting and Wong 1997).

  19. Bottazzi et al. (2008, p. 511) find a conflicting relationship. A virtually unanimous finding is that PE involvement is highly dynamic (e.g. Birmingham et al. 2003, p. 226).

  20. Regarding PE involvement, the German works of Schefczyk and Gerpott (1998) must be emphasized. In a very elaborate LSREL model on German VCs’ he demonstrated that the degree of involvement may not be as important as the kind of interaction. In a similarly elaborate study (Meier 2006, p. 114; Meier et al. 2006, p. 1050) found out that informal relationships, active participation of the VC, the use of external consultants and efficient management systems are associated with better PFC performance. Finally, Kranz (2008) analyzed gaps between actual and desired involvement.

  21. The AIFM Directive will also include provision to limit the scope of debt-push-down (European Parliament 2010).

  22. Demiroglu and James (2010) analyse LBO capital structure and conclude that PEs with high reputation use more debt and have favourable debt conditions. The most extensive theory of capital structure in PE investment is provided by Axelson et al. (2009).

  23. Numerous studies have also focused on the effects of the financial instruments involved (predominantly convertible securities) (e.g. Bascha and Walz 2000, 2001; Casamatta 2002; Cornelli and Yosha 2003; Gilson and Schizer 2003; Cumming 2005; Hellmann 2006; Haagen 2008).

  24. Other studies in the buyout sector estimate a sales growth differential of 7–10 % (e.g. Loos 2006; Cressy et al. 2007a).

  25. The author attributes this effect to opposing signals regarding ownership concentration. A similar study by Achleitner et al. (2010a) affirms positive short term wealth creation effects of PE announcements.

  26. Phalippou and Gottschalg (2009, p. 1447) contest the view of persistent over-performance articulated by Kaplan and Schoar (2005) and find that this is only true due to unskilled LP allocation. In the case of sophisticated LPs, previous fund performance loses its predictive capacity (Phalippou 2010, p. 577).

  27. More optimistically, Achleitner (2009, p. 2) estimates that 66 % of PE return is attributable to operational improvements. A very interesting, but methodologically disputable study by Meerkatt et al. (2008) has attempted a longitudinal view of PE return. Supposedly the 1980s were characterized by a high reliance on leverage, while the boom years of the 1990s were driven by multiples expansion. From the millennium until the financial crisis in 2008 PE funds benefited from global earnings growth. The authors predict that margin improvements will be the most important post-crisis success factors (Meerkatt et al. 2008, p. 13).

  28. A similar attempt was recently made by Siegel et al. (2011).

  29. Matched sample studies are sometimes combined with two-step regressions based on Heckman (1979).

  30. Müllner (2012) applies a novelty approach and combines objective performance measures with subjective matching by asking PFC management for their “main competitor” and conducting a subsequent matched-sample study.

  31. Such immense challenges have prompted Lockett et al. (2008, p. 47) to state that: “…measuring does not accurately represent the interaction between the VC firm and the investee. …actually asking the investee firm what assistance they received …is a potential solution to this problem”.

  32. An interesting, and largely ignored, group of investors are, for example, sovereign wealth funds (SWFs) (see International Monetary Fund 2008). Due to their unique governance setting, SWF could be valuable in explaining, the institutional antecedents of PE heterogeneity.

  33. One such study was made by Bharath and Dittmar (2010), who analysed the different motivations of firms attempting a public-to-private and firms deciding to stay quoted. In another study, Achleitner et al. (2010b) model the propensity of being taken over by a PE as a function of incumbent shareholder monitoring and control.

  34. As Acharya et al. (2009, p. 38) noted: “…considerable interest remains in understanding in greater depth the nature of engagement and involvement of PE houses with portfolio companies and providing more robust evidence on how theses relate to value creation.”

  35. This assessment is also shared prominently by Siegel et al. (2011, p. 193) who demand more case-study based research.

  36. One such attempt was made by Ruhnka et al. (1992) who analyzed the dynamics of what he termed the “living dead phenomenon”.

  37. Lockett et al. (2008, p. 55) agree and demand that “future research should provide a more nuanced understanding of the precise nature of VC resources in relation to internationalization activities.”

  38. The current edition of the AIFMD Directive of the European parliament has, for example, been heavily criticised for not differentiating between different types of funds (EVCA 2009b).

  39. In 2007 the European Commission established an expert group on removing cross-border barriers for PE and creating a single market framework (European Commission 2006, 2007a, 2007b).

  40. Less optimistically, Kaplan and Strömberg (2009, p. 137) predicts “years that will prove disappointing for PE”. However, in a following paper they see “little that makes us believe that the VC model has changed or is broken” (Kaplan and Lerner 2010, p. 46). Different post-crisis scenarios are discussed by Lerner (2011).

  41. Recently, several SM and IB scholars have recently called for further (re)integration of financial aspects (e.g. Agmon 2006; Greg Bell et al. 2012).

  42. In 2007 the Dubai International Financial Centre Fund (DIFC) became the largest shareholder in Deutsche Bank. A year before, Deutsche Bank opened a subsidiary in the fund’s proprietary financial centre. The main aim was to expand the bank’s operations in the Middle East (Bank 2006; Timmons 2007).

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  1. Institute for Export Management, Vienna University of Economics and Business, Althanstraße 51, 1090, Vienna, Austria

    Jakob Müllner

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Müllner, J. Private equity and venture capital funds—from the state of research to a comprehensive model and an interdisciplinary research outlook. J Betriebswirtsch 62, 119–167 (2012). https://doi.org/10.1007/s11301-012-0085-6

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