Historically, research into private equity topics runs into one major barrier: access to data.
Finance professor Greg Brown, an expert in private equity, is familiar with the challenges of finding and analyzing data sets, which by their nature are private.
Big, institutional, multibillion-dollar investors don’t like to disclose this information,” Brown said. “If you’re lucky, you get a large limited partner to share their portfolio with you, which would give you data on hundreds of funds.”
There was no large, authoritative data source for private equity – until now. UNC Kenan-Flagler recently announced a collaboration with the Burgiss Group, a software and analytics company that provides data, management and analysis tools for investors in private equity funds. Now Brown has access to data on thousands of funds.
Brown has been developing a relationship with Burgiss over the past few years, and he has conducted one study and supervised another by a doctoral student, tapping into the Burgiss data sets for both. “The Next Generation: Global Private Investing” conference at UNC in December was the third such meeting he orchestrated to bring together high-end practitioners at the portfolio manager research level with academics researching private equity topics of buyout, venture, distressed and debt investing.
The conferences have been “research dating,” getting-to-know-you opportunities between academics and practitioners, Brown said. Limited partners are very interested in academic research, but they don’t want to share their data with everyone. The conferences have built trust between the people sharing the data and the people wanting to use the data for high-quality empirical research.
“Burgiss would share a little data, and academics would show some results,” Brown said. “They’d share a little more; we’d generate more results.”
UNC Kenan-Flagler gathered a consortium that includes the University of Virginia Darden School of Business, the University of Chicago Booth School of Business, and Saïd Business School, University of Oxford. UNC Kenan-Flagler, as the lead partner in the group, will play the gatekeeper role and coordinate the consortium.
A paper by Brown’s doctoral student Serdar Aldatmaz, “Private Equity in the Global Economy: Evidence on Industry Spillovers,” is the most recent to come out of the collaboration with Burgiss. Aldatmaz wanted to find out whether there was any empirical evidence to back up the anecdotes about vulture capitalists buying a company, firing everyone and shipping the jobs overseas.
The Burgiss data set allows Aldatmaz to study specific investments from private equity funds in 19 industries in 48 countries broken down by year. They show actual dollar amounts that have gone out of private equity funds into a particular industry in a particular country in a particular year. Aldatmaz used a statistical technique to examine the relationship between those investments and what happens to publicly traded companies in each country. He noted how the investments affected employment, profitability and productivity.
His results revealed an overall positive effect when private equity investments were made. In the industry as a whole, employment, productivity and profit margin all increased.
“When private equity firms come in, they light a fire under other companies that are then forced to improve because the competition has gone up,” Brown said. “They’ll have to reform their business operations, make sure their finances conform with best practices, do what private equity firms demand of the companies they’re backing. In economics, these are called spillover effects.”
Private equity firms are in a sense forcing companies to become more productive and more profitable. Moreover, growing employment will lead to overall greater wealth in the economy. Governments have no need to nervously put up barriers to outside investment, Brown said.
Private equity investments have a relatively minor impact on the stock market, Aldatmaz’s research showed. The effect depends on whether the investment is a buyout or an investment by venture capitalists. A buyout firm tends to have a negative effect on other industry returns, whereas the stock market reacts positively to venture capitalists.
Because venture capitalists usually make early-stage R&D investments, their interest in a company is akin to validating that the industry is worth investing in. It increases the likelihood that another venture capitalist will invest in a similar company in the same industry in the same country.
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[This article has been reproduced with permission from research from the UNC Kenan-Flagler Business School: http://www.kenan-flagler.unc.edu/]