Tuck Forum on Private Equity
and Venture Capital

U.S. Innovation and Chinese Competition for Innovation Production

In this paper, we examine how competitive shocks from China impact U.S. innovation through two distinct margins: the markets for innovation and existing products. 

Increasingly there has been a focus on the impact of China's meteoric rise as an economic power and its impact on the innovation spending by established…

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Education and Innovation:  The Long Shadow of the Cultural Revolution

How important is the education of CEOs to firm level innovation?  In this paper, we examine the human capital cost of an external loss of education on subsequent innovation by firms and ask if it impacted firms more than 30 years later.  We examine the ensuing innovation of Chinese firms…

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Valuing Private Equity Investments Strip by Strip

Institutional investors have steadily increased their allocation to asset classes that do not trade on public securities markets — such as private equity, which now accounts for $5.8 trillion in assets under management. However, traditional asset pricing methods are not well suited to value investments that do not trade on…

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Constructing Optimized Private Equity Programs

We believe that as private markets have grown, institutional investors consider such strategies less ‘alternative’ and more ‘core’ to their overall portfolio. As a result, there is a growing need to take a more holistic and analytical approach in building private market portfolios, benefitting from the various investment types available…

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Technological Disruptive Potential and the Evolution of IPOs and Sell-Outs

Since the late 1990s, the number of private firms exiting via initial public offerings (IPOs) in U.S. markets has sharply declined. At the same time, the number of exits via acquisitions (i.e., sell-outs) has soared. Successful firms are nowadays more likely to sell-out to other (public or private) companies than…

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Be Careful What You Ask For: Fundraising Strategies in Equity Crowdfunding

The so-called “FinTech revolution” is beginning to have a significant impact on the way new companies are financed. In the UK alone, it is estimated that at least 40% of early stage financing is now received via Equity Crowdfunding platforms, where the public (i.e., unaccredited investors, aka the crowd) invest…

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Access to Collateral and the Democratization of Credit

France's Reform of the Napoleonic Security Code

Several countries use security laws derived from the Napoleonic Code, a regime predicated on the notion of “possessory ownership.” Under the highly-formalized, centuries-old Code, physical assets are deemed to be “unique,” “whole,” and “non-transferrable”. These legal frictions ultimately limit the types of security…

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Geographic Concentration of Venture Capital Investors, Corporate Monitoring, and Firm Performance

The coordination of venture capital (VC) investors in their syndicate significantly influences their choice of contractual terms and portfolio firm performance. The difficulties in coordination and corporate monitoring incentivize VC investors to choose contractual mechanisms designed to protect them from the downside risks of early-stage entrepreneurial firms. Moreover, their firms…

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Private Equity and Taxes

We study companies’ tax avoidance behavior after being acquired in a private equity transaction. We find that target companies’ effective tax rate decreases by 16.14% relative to the unconditional mean. This finding is in line with the hypothesis that private equity investors create shareholder value by extracting money from the…

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Foreign Investors & Domestic Company Growth: Evidence from US Venture Capital Investments in Sweden

There is a long-standing debate about the advantages and disadvantages of foreign investors. Advocates emphasize the benefits of foreign capital, expertise and networks, whereas critics worry about hollowing out domestic economic activities. This debate also pertains to the financing of start-ups by venture capitalists (VCs). The US is the epicentre…

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Contracts with Benefits: The Implementation of Impact Investing

Impact investing has rapidly become a major force in both the public and private financial markets. In just a decade or so, it has grown both on the money-management side and on the entrepreneurial side from a niche to a sector with at least $35 billion in deals in 2018Continue reading ⟶

Who Creates New Firms When Local Opportunities Arise?

A growing theoretical and empirical literature shows that new business formation is key to understanding how economies respond to economic shocks. For example, new firms generate the majority of jobs created in response to fluctuations in local demand or following oil and gas discoveries.

The magnitude of the firm entry…

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VCs, Founders, and the Performance Gender Gap

Platform Credit and E-Commerce Market Structure

Acquisition Prices and the Measurement of Intangible Capital

Investments by firms into intangible capital play a pivotal role in a firm’s strategy and value in today’s economy. However, because the benefits to these investments can be uncertain, current financial statements under U.S. GAAP mandate that firms record these investments as operating expenses, despite the long-term benefits these investments…

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Innovation Investment and Labor Mobility: Employee Entrepreneurship from Corporate R&D

How does corporate research and development (R&D) investment affect employees? This paper examines the effect of R&D on employee retention and moves out of the firm. We are motivated by the importance of R&D to economic growth. In the process of generating new knowledge, technology, and skills, R&D is also…

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Do Private Equity Firms Pay for Synergies?

It is a commonly accepted view that strategic acquirers incorporate synergistic value into their bids for targets, while private equity (PE) funds presumably do not because they lack operating similarities with the portfolio firm. Empirical evidence provides some support for this view but is limited to PE bids in so-called…

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Venture Capital Contracts

A large body of academic work examines the problem of financial contracting, and frequently uses the context of an entrepreneur negotiating a financing deal with an investor. Entrepreneurial firms are key drivers of innovation and employment growth, and the efficient allocation of capital to early stage firms is crucial to…

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Private Equity Buyouts: Anti- Or Pro-Competitive?

Antitrust authorities intervene in mergers and acquisitions involving private equity (PE) firms. For example, in October 2011 a federal judge in the U.S. stopped H&R Block from acquiring 2nd Story Software, owned by the PE firm TA Associates. The Justice Department argued that the merger would harm competition in the…

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Trademarks in Entrepreneurial Finance

Trademarks are an important determinant of the economic value created by firms. A trademark is a word, symbol, or other signifier used to distinguish a good or service produced by one firm from the goods or services of other firms. Firms use trademarks to differentiate their products from those of…

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Investing Outside the Box: Evidence from Alternative Vehicles in Private Equity

The last two decades have seen a significant transformation of the structure of the private equity (PE) industry. Not only has the amount of capital under management by buyout, venture, and private debt funds grown dramatically, but it has become more concentrated in a smaller set of fund families. At…

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Persistent Blessings of Luck: Theory and an Application to Venture Capital

Financial economists have long debated whether or not investment managers differ in the skills they have. While studies of individual stocks, mutual funds, and other fund classes generally find that investors do not consistently outperform passive benchmarks after-fee and out-performance is not persistent, an important exception is the private equity…

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Management Practices and Mergers and Acquisitions

A fundamental question in corporate finance is how mergers and acquisitions create value? Value creation could arise from many sources, including economies of scale or scope, increases in managerial efficiency, improvements in production techniques, or increases in market power. However, while synergies are the leading motive behind mergers, direct empirical…

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Is Private Equity Good for Consumers?

Private equity firms are becoming increasingly entrenched in the day-to-day lives of consumers, acquiring many of our favorite products found on store shelves.  Should consumers care?  What happens to brands under private equity ownership?  These deals often elicit negative reactions.  A common view is that private equity firms try to…

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Selling Innovation in Bankruptcy

Innovation is crucial for the modern economy. Financing innovation is an important but challenging task for innovative firms as innovation is associated with high degree of uncertainty. In addition, the high-risk nature of innovation makes failure highly likely and thus the bankruptcy process particularly relevant to firms’ financing policy. Ideally,…

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Liquidity Provision in the Secondary Market for Private Equity Fund Stakes

Once marginal due to contractual restrictions on transfers, the secondary market for Private Equity Fund (PEF) stakes took off soon after the 2008 financial crisis to an annual turnover of over $30 billion per year.

Behind this growth are the liquidity needs experienced by some investors since the crisis and…

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Squaring Venture Capital Valuations with Reality

Historically, most successful venture capital-backed companies went public within three to eight years of their initial venture capital (VC) funding.

More recently, many successful VC-backed companies have opted to remain private for substantial periods and have grown to enormous size without a public offering. Companies such as Uber, Airbnb, and…

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Why You Should Consider a “Permanent Capital” Investment Strategy

Much of the capital available to Small and Medium Enterprises (SMEs) around the world is in the form of private equity. Most of this capital is allocated via Private Equity (PE) firms that are generally structured with 10-year terms, and the investment target is 3x to 5x return in 3…

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Decreasing Returns or Reversion to the Mean? The Case of Private Equity Fund Growth

This article analyzes the interaction between the growth and the performance of the two most prominent groups of private equity (PE) funds: buyout funds and venture capital (VC) funds.

These funds are usually structured as closed-end, limited-life vehicles. Therefore, in order to keep earning fees, PE firms periodically attempt to…

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Initial Coin Offering and Platform Building

In an initial coin offering (ICO), a company or an open-source project pre-sells a cryptocurrency “coin” (or token) that is redeemable for some product or service to be offered at a later date.

This structure has recently gain tremendous momentum: According to CB Insights, in 2017 more than 800 ICO…

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When Investor Incentives and Consumer Interests Diverge: Private Equity in Higher Education

This paper studies the role of private equity in for-profit higher education.

Private equity and formerly private equity owned schools account for approximately 35 percent of total US for-profit enrollment, which in turn totals more than 2.5 million students per year. Relative to closely-held private firms or diffusely-held publicly traded…

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Synthetic Peer Benchmarking for Diversified Private Equity Programs

At BlackRock Private Equity Partners we believe that continued innovation of our tools and analytics is imperative in achieving superior risk-adjusted returns and delivering a distinguished and more transparent experience to our investors.     

As a private equity solution provider, most of our investors are invested in a collection or…

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Venture Capital Investments and Merger and Acquisition Activity around the World

In this paper, we investigate what happens to venture capital investments when M&A activity is regulated.  The paper studies the interaction between venture capital (VC) activity and M&A activity in 40 different countries around the world.  
 
The initial idea for this paper came from an interesting story…

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The Economics of PIPEs

Private placements of equity, commonly referred to as “PIPEs,” are an important source of financing for many public corporations. According to PrivateRaise, a leading database on PIPE transactions, between 2001 and 2015, there were 11,296 private placements of common stock by U.S. listed firms that raised $243.9 billion. Firms raising…

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Measuring Institutional Investors’ Skill at Making Private Equity Investments

Institutional investors have become the most important investors in the U.S. economy, controlling more than 70% of the publicly traded equity, much of the debt, and virtually all of the private equity. Their investment decisions have far reaching consequences for their beneficiaries:  universities’ spending decisions, pension plan funding levels and…

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Fewer and Less Skilled? Human Capital, Competition, and Entrepreneurial Success in Manufacturing

Young firms are considered to be the engines of growth and dynamism in an economy and the United States has long been considered to be a nation of entrepreneurs with the best institutions for young firms to flourish. Recently however, there has been mounting anecdotal evidence and academic research to…

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The Deregulation of the Private Equity Markets and the Decline in IPOs

Recent years have seen a sharp decline in the number of initial public offerings (IPOs) in the U.S.

While this decline has garnered considerable attention both in academic and policy circles and in the press, its causes remain unclear (Gao, Ritter, and Zhu (2013); Doidge, Karolyi, and Stulz (2013, 2017)).…

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The Remaking of Wall Street

Since the financial crisis of 2007-09, Wall Street has transformed dramatically. Constrained by post crisis regulatory limits, those investment banks surviving as bank holding companies (BHCs) have curtailed their investment banking and other activities. At the same time, private equity firms - among them, Blackstone, KKR, Apollo and Carlyle -…

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Cost of Experimentation and the Evolution of Venture Capital

The emergence of the "cloud" has had a major impact on the founding and growth of entrepreneurial firms.  This new technology began with the introduction of Amazon's Web Services in 2006.  It allowed software and internet companies to rent rather than buy powerful computing resources, thus lowering the…

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Team Stability and Performance: Evidence from Private Equity

In the paper “Team Stability and Performance: Evidence from Private Equity”, we empirically study the effect of team stability on performance in a team production environment. The effect of team stability on organizations is ambiguous. Stability (or lower turnover) can induce individuals to invest in relationship specific (team specific) capital…

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Financing and New Product Decisions of Private and Publicly Traded Firms

Public Firms Are Increasingly Seeking Out Private Capital.

In our paper “Financing and New Product Decisions of Private and Publicly Traded Firms,” forthcoming in the Review of Financial Studies, we investigate how the financing decisions of firms respond to investment opportunities presented by Medicare NCDs. They found that public firms…

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Fostering Entrepreneurship: Promoting Founding or Funding?

Everybody loves Silicon Valley. Imitations can be found worldwide: Silicon Forest (Oregon), Swamp (Florida), Gorge (UK), Glen (Scotland), Fjord (Norway), Wadi (Israel), Savannah (Kenya), and many more. Policy makers, in particular, are eager to foster entrepreneurial ecosystems by promoting entrepreneurship, with the hope to foster economic growth, employment, and innovation.…

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Does Economic Insecurity Affect Employee Innovation?

How does employee productivity respond to large shocks to household wealth? Over the past several decades, the annual proportion of households in the U.S. experiencing a severe economic loss has been steadily increasing, peaking with the recent financial crisis. The impact of household wealth shocks on consumption, savings, and retirement…

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Venturing Beyond the IPO: Financing of Newly Public Firms by Pre-IPO Investors

A wide body of literature emphasizes that venture capitalists (VCs) focus on young private companies, generally in high-tech industries.  However, we find that these investors fund companies after the IPO as well.  In a sample of private firms going public for the first time, 15% of the firms that were…

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Should Mutual Funds Invest in Startups?

A Case Study of Fidelity Magellan Fund’s Investments in Unicorns (and other Startups) and the Regulatory Implications 

Contrary to longstanding practice and to their reputation for investing in public companies, mutual funds, including some of the most prominent, are allocating portions of their portfolios to private venture-stage firms, including famous…

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The Persistent Effect of Early Success: Evidence from Venture Capital

Unlike other assets classes, private equity -- especially venture capital -- has been found to exhibit performance persistence. Money managers that perform well in one period have a higher likelihood of being above-average in their performance in the future. To understand better what might account for this persistence, we examined…

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The Life Cycle of Corporate Venture Capital

Recent decades have witnessed non-financial firms’ forays into venture capital by creating Corporate Venture Capital (CVC) divisions. That is, these firms create internal CVC divisions to make systematic minority equity investments in innovative startups. As an illustration, consider GM Ventures, the CVC unit initiated by General Motors in 2010. On…

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