Asia Private Equity Institute Research Awards 2014-15
Government Ownership and Venture Performance: Evidence from China, by Jerry Cao (Singapore Management University), Mark Humphery-Jenner (UNSW Australia) and Jo-Ann Suchard (UNSW Australia)
We study the government's role in VC market in China. The impact of government depends on whether the fund is wholly or partially government-owned at central or provincial level. Partially government-owned VCs improve venture success, e.g., the likelihood of exit via an IPO and the likelihood of exit in mainland China. Investment from provincial government-owned VCs is associated greater exit-success, with such advantage diminishing with more funds. Government-owned funds exhibit worse performance at the fund-level. Our findings suggest that government VCs may benefit through political connections may help VCs, but that excessive government control leads to inefficiencies.
Private Equity Insights
Mar 2014- Organizational diseconomies of scale in private equity partnerships, by Melvyn Teo
We explore diseconomies of scale in private equity partnerships. Naïve sorts indicate that firms that have launched many funds and raised more capital tend also to have delivered better performance. However, this is primarily driven by the flow of capital to firms that have done well in the past. Funds conceived by firms that launch funds in quick succession subsequently underperform funds conceived by firms that launch funds at a more moderate pace by 4.81 percent per annum. A dollar invested in the former yields 35 cents less than a dollar invested in the latter. Similarly, funds raised by larger partnerships that have launched many prior funds subsequently underperform funds raised by smaller partnerships that have launched few prior funds. These results persist after adjusting for the effects of own fund size on fund performance. They are also stronger for partnerships managing non-venture funds than for partnerships managing venture funds. Our findings suggest that rapid capital growth can strain the limited resources of a private equity partnership and engender suboptimal fund performance.
Jan 2014- The Sustainability of Private Equity in China, by Jerry Cao
This paper examines the factors driving private equity investment activity in China between 1999 and 2009 with the establishment of Shenzhen SME Board in 2004 as a natural experiment. We find that SME Board has a strong positive impact on private equity investment activities. The impact, however, appears to occur through the supply-side channel. Industry aggregate and deal level investment patterns support our key argument. The increase in activity is mainly driven by entry of new PE funds and government-backed funds. The research suggests that PE industry has grown due to favorable regulatory policy but also casts doubt on the sustainability of PE in China.
Sept 2013- The Private Equity Deal Landscape in China, by Lily Fang and Melvyn Teo
We explore the private equity landscape in China using a large transactions database with 17,585 transactions and US$367.50bn total capital flows. Private equity activities increased rapidly in the last two decades, from virtually non-existent in 1991 to a peak of US$92.59bn in 2011. Initially, entry transactions are driven by growth capital, although in the more recent years, we see a surge in venture, pipe, and buyout activity. Exits have concentrated in 2006, 2010, and 2011. General partners tend to invest in companies in finance, machinery, services, mining, food, and real estate. The average investment multiple for deals in China is an impressive 5.58 but the performance distribution is highly skewed. On one hand, 66.23 percent of the deals are either write-offs or have yet to deliver distributions to their investors. On the other hand, 21.38 percent of targets acquired deliver multiples in excess of three times initial capital. Significant variation in performance exists between industries, with mining and machinery outpacing finance and services. Finally, the duration of Chinese private equity investments has changed over time. The mean time to exit for deals initiated between 2001 and 2005 is less than two-third that for deals initiated prior to 2001. However, the investment cycle appears to be lengthening again after 2005, which is indicative of a more difficult exit environment.
Jun 2013- The Value of Human Capital in Private Equity, by Melvyn Teo
We explore the value of human capital in private equity. We find that funds with financial, technical, management, and networking skills outperform funds without such skills. Specifically, funds with top quintile expertise levels deliver IRRs that are 5.4 percent per year greater than do funds with bottom quintile expertise levels. Funds with many experts are also able to generate 50 cents more for every dollar invested and outperform public markets by 31 percent more relative to funds with few experts. Experts are more valuable for buyout, venture capital, and infrastructure than for growth and real estate. Funds that specialize in few industries and funds that are more hands-on in their investment approach tend to benefit more from partner expertise. While a host of skills are relevant in private equity, evidence suggests that strategic management skills are more important than technical expertise and industry knowledge. Finally, large funds are able to ameliorate some of the diseconomies of scale they face by employing more experts.
Mar 2013- Giants at the Gate: Capacity Constraints in Private Equity, by Melvyn Teo
We explore capacity constraints in private equity. We find that small funds outperform large funds by 7.99 percent per year (IRR). Every dollar invested in small funds delivers on average 66 cents more than a dollar invested in large funds. The effects of fund size are pervasive across most investment regions and fund types. About half of the spread between small and large funds may be traced to variation in fund performance across vintage years. Funds conceived when capital raising conditions are challenging tend to be smaller and outperform funds launched when capital raising conditions are benign. Still after adjusting for differences in returns across investment regions, fund types, and vintage years, an increase in fund assets under management from US$100 million to US$3 billion crimps returns by 4.08 percent per year. Large funds that invest in a wide range of countries and industries are better able to ameliorate the deleterious effects of size while funds that adopt a hands-on approach and require board representation in their portfolio companies are most susceptible to capacity constraints.
Dec 2012- The Rise of RMB Funds in China and Their Challenges, by Jerry Cao
In China, the market has witnessed rapid development, largely due to the abundance of entrepreneurial activities, ample liquidity and attractive exit opportunities. Despite its huge success, the private equity market is highly divided and faces many challenges. This paper documents the recent trends and describes the market structures. The analysis covers the characteristics of RMB funds such as fund raising, investment, exit and industry concentrations and compares RMB funds with US dollar funds. We highlight some structural challenges that may impede the future development of the private equity market in China.
Sep 2012- The Geography of Private Equity, by Melvyn Teo
We explore the impact of geographic proximity on the performance of private equity funds. Our analysis focuses on general partners that invest outside the developed world. We find that nearby funds outperform distant funds by 8.49 percent per annum (IRR). The outperformance of nearby funds is pervasive across most investment regions, fund types, and vintage years, and also manifest in investment multiples and public market equivalents. Fund size, industry specialization, and geographical specialization heighten the effects of a local informational advantage. Distant funds are able to compensate for their geographical disadvantage by leveraging on financial, technical, and management expertise. On balance, the findings suggest that geographically proximate general partners enhance performance by leveraging on local information networks to source for and exit from deals.
Last updated on 05 Feb 2015 .