Private Equity funds and their performance in the post-crisis period

• Thesis title in Czech: Fondy soukromého kapitálu a jejich výkonnost v post krizové době
• Thesis title in English: Private Equity funds and their performance in the post-crisis period
• Key words: Fondy soukromého kapitálu, rizikový kapitál, vnitřní návratnost, fúze a akvizice, zadlužené akviziční struktury, Hypoteční krize
• English key words: Private equity, Venture capital, Internal rate of return, Mergers and Acquisitions, Leveraged buyout, Subprime mortgage crisis
• Academic year of topic announcement: 2017/2018
• Thesis type: Bachelor's thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: prof. PhDr. Ladislav Krištoufek, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 15.05.2018
• Date of assignment: 15.05.2018
• Date and time of defence: 10.09.2019 09:00
• Date of electronic submission: 31.07.2019
• Date of proceeded defence: 10.09.2019
• Opponents: Mgr. Ing. Adam Kučera, Ph.D.

References

Seznam relevantních publikací – Svět:

❖ Phalippou, Ludovic and Gottschalg, Oliver, Performance of Private Equity Funds. EFA 2005 Moscow
Meetings
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=473221

❖ Vinten, Frederik Christian, Essays on Private equity, CBS School of Economics and Business
Administration 2008
http://openarchive.cbs.dk/bitstream/handle/10398/7682/frederik_vinten.pdf?sequence=1

❖ Kaplan, Steven N. and Schoar, Antoinette, Private equity performance: Return, Persistence, and Capital
flows, University of Chicago 2005
https://onlinelibrary.wiley.com/doi/epdf/10.1111/j.1540-6261.2005.00780.x

Seznam relevantních publikací – Karlova Univerzita:
❖ Sedláková, Petra, Development of private equity funds in the Czech Republic, Charles University 2008
https://is.cuni.cz/webapps/zzp/detail/8001104827/30503041/?q=%7B%22______searchform___search%
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basic%22%3A%221%22%7D&lang=cs

❖ Mravec, Vojtěch, Further Determinants of Private Equity, Charles University 2012
https://is.cuni.cz/webapps/zzp/detail/93078/30503041/?q=%7B%22______searchform___search%22%3
A%22private+equity%22%2C%22______searchform___butsearch%22%3A%22Vyhledat%22%2C%22
______facetform___facets___faculty%22%3A%5B%2211230%22%5D%2C%22PNzzpSearchListbasic
%22%3A%221%22%7D&lang=cs

❖ Ballek, Richard, Private Equity Fund Performance The Comparison of Venture Capital Funds and Buyout
Funds in Europe and the Determinants of their Returns, Charles University 2016
https://is.cuni.cz/webapps/zzp/detail/142254/30503041/?q=%7B%22______searchform___search%22%3
A%22private+equity%22%2C%22______searchform___butsearch%22%3A%22Vyhledat%22%2C%22
______facetform___facets___faculty%22%3A%5B%2211230%22%5D%2C%22PNzzpSearchListbasic
%22%3A%221%22%7D&lang=cs

Preliminary scope of work

❖ Uvedení pojmů Private equity, Leveraged Buyout, Venture Capital, a jejich všeobecné zaměření,
respektive specializace a jejich stručná historie. (rozsah 2 normostrany)

❖ Popis životního cyklu Private equity fondů, jejich účel a význam ve finančním sektoru, investice a
investiční strategie. (rozsah 3 normostrany)

❖ Měření výkonnosti PE fondů, IRR, MoM, MIRR, TVPI, DPI (rozsah 2 normostrany)

❖ Hypoteční krize, popis stavu finančního systému během let 2007-2009, vytvoření obrovské investiční
příležitosti pro levný nákup společností a reakce PE fondů na tento vývoj. Úvod pro první testovanou
hypotézu, výkonnost PE v těchto letech by měla být větší než historická výkonnost. Sledování
úspěšných, neúspěšných, regionálních, všech PE fondů v letech 2012-2017 po exitu jejich investic
z hypoteční krize. (rozsah 5 normostran)

❖ Dozvuky hypoteční krize a prostředí nízkých úrokových sazeb během následující dekády

➢ Popis makroekonomické situace ve světě v post krizové době, vliv nízkých úrokových sazeb na
finanční sektor, ocenění aktiv, respektive portfolií, analýza podmínek pro nákup a prodej společností
všeobecně, specifický vývoj v České republice i v celém CEE regionu. Následné důsledky na
výkonnost a význam PE fondů. (rozsah 2 normostran)

➢ Úvod pro druhou možnou hypotézu, význam PE fondů ve finančním systému vzrůstá, objem a počet
transakcí, převážně v kapitálově orientovaných zemích, proti bankovně orientovaným zemím a
v rozvojových zemích, proti rozvinutým zemím. (rozsah 2 normostran)

➢ Úvod pro třetí možnou hypotézu, vliv nízkých úrokových sazeb na výkonnost PE fondů z pohledu
jejich investiční strategie, levné peníze nahrávají typu transakcí LBO, porovnání výkonnosti VC a
LBO fondů regionálně, globálně. (rozsah 2 normostran)

➢ Úvod do analýzy podmínek pro nákup a prodej společností všeobecně, i ze specifického pohledu
České republiky a CEE regionu, díky „nedávné“ ekonomické transformace. (rozsah 2 normostran)

❖ Analýza časových řad, hlavní model. Otestování několika hypotéz multilineárním regresivním modelem:
(Vlastní) Vliv makroekonomických ukazatelů (HDP, inflace, úrokové sazby) na výkonnost PE
fondů podle regionů (US, UK, Benelux, CEE, Asie); (Převzaté) Nalezení nejdůležitějších proměnných
určujících výkonnost PE fondů a následně možná analýza vybraných scénářů do budoucích let pro PE
fondy.

➢ Specifikace dat pro hypotézy, popis testovaných hypotéz a testu samotného. (rozsah 5 normostran)

➢ Interpretace výsledků. (rozsah 5 normostran)

Preliminary scope of work in English

Research question and motivation
I am going to study the performance of PE funds in the recent times when many macroeconomic models stopped working. I am focusing on whether macroeconomic indicators can explain the performance of PE funds and if this fact can cause the results from previous papers to be biased. Furthermore, I am going to analyze several possible macroeconomic scenarios and report the expected influence of them on the PE funds’ performance. I find this topic very interesting and important in the current economic environment with all-time high stock valuations and low bond yields, where investors try to find alternative ways to investment their capital, with the ultimate goal to beat the market. PE is one of the options and additionally the significance of PE funds in the financial system has been growing recently again. Therefore, I believe that my research can be useful in both the academic world and the real world.

Contribution
Because of the limited access to data describing the performance of PE funds, which also usually includes the reporting bias, this topic is not frequently analyzed in the academic world, especially in the CEE and other developing regions. My research is going to build on the old findings and evaluate their contribution to this topic. Nevertheless, the main contribution of my research is going to be the idea of macroeconomics indicators being one of the potential drivers of PE funds’ performance. In the majority of recent papers, the authors attempt to explain the performance of PE funds by linking it to microeconomics indicators, but all of these results can be biased as they are exposed to overall macroeconomic conditions. Moreover, I am going to provide the analysis of possible future scenarios, which I also failed to find anywhere else. This paper could serve as a foundation for further research of PE funds’ performance, evaluation of my proposed scenarios and possibly as an evaluation of whether PE funds are a good investment.

Methodology
I am going to work with data on the performance of PE funds (dependent variable) from one or more global and local databases including CapitalIQ, Preqin, EVCA, CVCA and Invest Europe. Furthermore, I will use macroeconomic data on interest rates, GDP, inflation, etc. (independent variables) that are publicly available. I am going to combine them into several econometric models (using the best estimators and time series analysis), in order to find out, what are the indicators of PE funds’ performance. In addition, I am going to analyze some possible future scenarios and their expected effect on PE funds’ performance (this part is going to be similar to the stress test in the banking industry).


Outline

 Introduction of the terms Private equity, Leveraged Buyout and Venture Capital, their focus, specialization and brief history. (2 standard pages)

 Description of PE funds’ lifecycle, their purpose and significance in the financial system, their investments and a discussion of their investment strategies. (3 standard pages)

 Measurement of PE funds’ performance using IRR, MoM, MIRR, TVPI, DPI (2 standard pages)

 Subprime mortgage crisis, a description of the state of the financial system during 2007-2009, the creation of an unusual investment opportunity to acquire companies at a large discount and the reaction of PE funds to this development. Introduction to the first tested hypothesis which states that the performance of PE funds in these years should be better than their historical performance. Monitoring of successful, failed, local and all PE funds in 2012-2017 following the exits from their investments made during the subprime mortgage crisis. (5 standard pages)

 The consequences of the subprime mortgage crisis and the low interest rates over the last decade

o Description of the macroeconomic situation in the post-crisis world and the influence of low interest rates on the financial sector, valuation of assets and portfolios. Analysis of conditions for purchases and sales of companies from a general point of view. Specific development in Czech Republic and in the CEE region. Subsequent consequences on the local PE funds’ performance and their importance. (2 standard pages)

o Introduction to the second possible hypothesis outlining the increasing importance of PE funds in the financial system and the rising volume and number of transactions, in the capital-oriented countries in comparison to the banking-oriented countries, and in the developing countries against the developed countries. (2 standard pages)

o Introduction to the third possible hypothesis outlining the effect of low interest rates on PE funds’ performance and the effect of cheap money creating positive conditions for LBO transactions. Comparison of the performance of VC and LBO funds regionally and globally. (2 standard pages)

o Introduction to the analysis of conditions for purchases and sales of companies from a general point of view and from the point of view of Czech Republic and of the CEE region, thanks to the recent economic transformation (2 standard pages)

 Time series analysis, main model. Testing of several hypotheses with a multilinear regression model: The impact of macroeconomic indicators (GDP, inflation, interest rates) on the performance of PE funds by region (US, UK, Benelux, CEE, Asia); Finding the most important variables that determine the performance of PE funds and possibly an analysis of selected scenarios in the future years for PE funds.

o Specification of data for hypotheses, description of tested hypotheses and test itself. (5 standard pages)

o Interpretation of results. (5 standard pages)