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Inside the $2.5 Trillion Global Private Equity Market


rivate equity funds’ roles in the economy and their managerial compensation drew scrutiny following the recent global financial crisis, and there is an ongoing debate about increasing taxation on private equity managers’ profit participation, and on the industry’s impact on innovation, competition and employment. Over the past 15 years, worldwide private equity investment has skyrocketed from $100 billion in 1994 to about $2.5 trillion today, driven by institutional investors’ portfolio allocation to private equity, which increased from 3 percent on average in 1997 to 12 percent in 2007 for large foundations. Associate Professor Ayako Yasuda recently teamed with Professor Andrew Metrick of the Yale School of Management to publish the first survey paper of its kind to treat and examine both the venture capital (VC) and the buy- out (BO) segments as subsets of a broader, private equity industry. The paper, “Venture Capital and Other Private Equity: A Survey,” was the lead article in European Financial

Management (September 2011). “We focus on what distinguishes both VC and BO funds from hedge funds and mutual funds, for example,” the authors write, “and discuss the theory and evidence on this ‘private equity’ industry both as financial intermediaries and as an asset class.” Their study notes the importance of private ownership, and information asymmetry and liquidity associated with it, to explain what makes private equity different from other asset classes. The paper reviews the literature on various topics, including value-added activities of VC and BO investors, performance of private equity funds, and contracts between private equity fund managers and their investors. “Both VC and BO backing is associated with significant changes in the ways the investee companies are operated, including more independent and hands-on boards, higher earnings quality, and higher CEO turnover,” Yasuda and Metrick write. On the flip side, investors in VC and private equity funds ink contracts that will best align their interests, via a profit-sharing agreement, closed-end, finite-life fund structure, limited reinvestments, and explicit negative covenants preventing VC and BO fund managers from taking excessive risk and/or diverting efforts away from funds. >>

Capping the day, Graduate School of Management alumnus Joncarlo Mark MBA 00 (left) moderated an all-star panel on the role of private equity in corporate governance, finance and operations. Mark recently founded Upwelling Capital, an advisory and investment management firm, after 12 years with CalPERS, where he led the restructurings of more than $2 billion of private equity partnership interests. The panel featured alumna Sarah Corr MBA 01, senior portfolio manager at CalPERS; Amador Bustos, president and CEO of Bustos Media; Dennis Roberts, CEO of The McLean Group; and UC Davis alumnus and Dean’s Advisory Cabinet member Mike Child 76 (right) of TA Associates, one of the oldest and largest private equity firms in the world.

Symposium Shines Spotlight on Private Equity B y A l ex R usse l l


he Graduate School of Management hosted

its second annual Symposium on Financial

Keynote speaker Raymond Chan of the private equity management firm Adams Street Partners

Institutions & Intermediaries in March, bringing

presented an internal analysis based on his

together two dozen top scholars and industry

firm’s confidential, proprietary data that explored

practitioners from around the world.

the risk-return relationships in various segments

Organized by Associate Professors Ayako Yasuda and Roger Edelen, the symposium focused on private equity, an asset class that

of private equity, from venture capital to corporate buyouts. “This makes for a veritable Disneyworld of

typically raises capital from institutional

insights for academics,” said Edelen. “Private

investors to invest in companies that are already

equity represents an increasingly important

private or are public and then taken private.

channel for capital allocation. It has several

Yasuda said that private equity funds are

unique dimensions that provide an intriguing

becoming a more important asset class for

setting for economic study. Often, these insights

public pension funds and others, but have not

come totally out of the blue, sparking new angles

been as thoroughly researched as banks or

on the structuring of academic inquiry.”

mutual funds. Republican presidential nominee Mitt Romney’s experience as co-founder of Bain Capital has turned a national spotlight on private equity as a political issue. “That’s increasing the mental share of private equity and its role in the economy in the press,” said Yasuda. “This is not an abstract, esoteric topic up in the ivory tower.”

“There is a wide variety of interesting research being conducted worldwide on private equity as it has become a core strategy for most institutional investors over the last 20 years,” said Joncarlo Mark MBA 00. “More research will help further shape how institutions will consider and allocate to the asset class.”

14 S U M M E R 2012 I N N OVATO R

Profile for UC Davis Graduate School of Management

Summer 2012 innovator  

Summer 2012 innovator