W1 Private equity demystified ch7 PE critics

[Audio] Private Equity Demystified: An explanatory guide. Fourth Edition. John Gilligan and Mike Wright, Oxford University Press (2020). © John Gilligan & Mike Wright. DOI: 10.1093/oso/9780198866961.003.0007 7 The Private Equity Critics and the Research In this final chapter we draw together the major criticisms levelled at the private equity sector. We clarify some misrepresentations and myths, in the light of experience over the evolution of the market and the weight of systematic evidence summarized in this book. We then look at areas which, in our opinion, are under-researched. We need to distinguish between analysis at the fund level and at the level of the underlying individual investments. The majority of studies in the finance literature are at the fund level and discuss private equity as an investment strategy. Analysis at the investment level is often done by case study, which always risks creating general conclusions from specific examples. The non-financial academic literature has more investment-level analysis both from a quantitative and a qualitative perspective. At the Level of Individual Investments The Industry is Short-Termist and Results in Underinvestment and Value Extraction One major strand of the critique of private equity is that it is short-termist and does not build long-term value. It is claimed that private equity is about cutting jobs, stripping assets, derecognizing unions, and exiting the business in a short time horizon. This, it is claimed, is value extraction, not value creation. There is now a very significant body of systematic evidence available—and summarized here—which shows that this view is very simplistic and cannot be applied to the majority of private equity strategies. Private equity deals are varied and heterogeneous in terms of their strategies and timescales. In Figure 7.1 we try to simplify this variety of contrasting timescales and strategies. Some investments do involve one-off 'shock therapy' (Quadrant 4) to increase prices, reduce costs, and improve capital intensity. We need to emphasize that shock therapy can be a necessary alternative to acute and chronic underperformance. This is consistent with the principal–agent hypothesis in academic research. It may involve the reversal of valuedestroying behaviour in order to improve efficiency over a short time period. This type of shock therapy was probably more typical of the first wave of PE-backed buyouts in the 1980s. In these types of transaction, the management of the company are supported by the.

[Audio] Private Equity Critics and the Research 283 PE firm in introducing financial and governance processes that eliminate waste and improve efficiency. A second category of transaction is a longer-term strategic repositioning (Quadrant 3). We might characterize these as transactions where a company needs to take a step back to take two steps forward. This is notoriously difficult to achieve as a quoted company, or as part of a quoted company, where stable earnings growth is highly valued. These situations often involve initial falls in employment and radical cost reduction in failing business lines, alongside investment in the streams that will support future growth. The idea is to rebuild the base for a more stable business over the longer term that can recover employment and profitability and return to a more stable earnings pattern. The two other categories of transaction involve growth strategies, rather than cost cutting and reconstruction. Where businesses have been capital-constrained by their owners, a PE-backed buyout may provide the opportunity for catch-up investment or M&A that generates a step change in the business in relatively short order (Quadrant 1) (accelerated growth). Finally, some investments are made based on longer-term growth strategies (Quadrant 2) either by sector or internationally. These may be buy and build strategies, or longer-term growth that is at the limit of the traditional 10+2 fund. An individual investment might incorporate many or indeed all of these strategies at once. At the centre of all of these strategies is the core idea of improving management and management systems to generate information and control that facilitates the decisions required to increase future cash flows that are the source of shareholder value. When looked at through this lens private equity is not an investment strategy, it is a collection of strategies with a common theme of seeking to use professionalization of business management and an efficient financing structure to create and realize capital appreciation. Shorter Term Quadrant 1 Quadrant 4 Quadrant 3 Quadrant 2 "Accelerated Growth" Professionalisation of Management "Shock Terapy" "Disruption" "Consolidation" - M&A - New Business Models - Reorganisation - Outsourcing - Capex - Internationalization - New Products/Services - Catch Up Investment - Price Increases - Reporting & Systems Development - Changes in Top Management - Governance Changes - Cost Reduction - Asset Sales - Repositioning - Break Ups - Outsourcing - Reorganizations - Buy & Build - Roll Out Term of Investment Tesis Premise of Investment Tesis Growth Efficiency Longer Term Figure 7.1. Buyout types, strategy, and timescale Source: The authors.

[Audio] 284 Private Equity Demystified The critics focus on the unpleasant and damaging consequences on individuals of the efficiency strategies, but rarely comment on the employment effects of the growth strategies. The industry does the opposite and hence we have a polarized 'debate' about the impact of private equity, with both sides essentially focusing on only one or two of the quadrants of Figure 7.1. Is There Excessive Debt and Are Gains All from the Use of Cheap Leverage? Critics have argued that many deals are again being completed with levels of debt that are too high, just as they were in the boom years prior to the financial crisis. Using 'excessive' levels of debt to acquire corporations generates risks. The argument is that these risks are borne by the wider stakeholders of the business including both employees and creditors. Neither of these groups benefit from the increased rewards that this risk generates. Recent evidence has broadly confirmed that the private equity industry is a taker of increased availability of leverage, not a generator of the supply of debt. Leverage rises when credit is more freely available and falls, even for the most established private equity funds, when credit tightens. We have seen that attribution is controversial. However, the published attribution studies show that while some gains derive from the leverage in private equity deals, the largest proportion comes from fundamental improvements to the business. It is not clear whether this reflects good stock picking (i.e. the extent to which Private Equity firms are good at selecting good deals) or good operational management post transaction (i.e. whether they add value once they have made an investment). The most recent industry research seems to show that operational improvements account for less than the inflation in overall asset prices caused by the low interest rate environment of the last decade in the West. The evidence on growth vs efficiency is not conclusive. More data and analysis at the investment level is needed to have any clear idea if there is a difference in the overall performance of any strategy. Looking at the risk element in the equation, our review of the evidence indicates that after taking other factors into account, PE-backed firms are not significantly more likely to enter formal bankruptcy proceedings (administration) than non-PE-backed companies. Recent evidence based on the population of UK limited companies has also found that during the period 2008–11, and taking into account firm-specific, industry, and macro-economic factors, PE-backed buyouts reported significantly higher profitability and cumulative average growth rates than non-PE-backed private companies. These findings suggest that PE-backed firms' underlying performance held up better during the recession following the financial crash than did that for non-PE-backed private companies. This result has been independently replicated on both sides of the Atlantic. Is Private Equity about Majority Acquisitions of Large Listed Corporations? While majority acquisitions by private equity firms of listed corporations tend to attract considerable media (and research) attention, these deals are only part of the private.

[Audio] Private Equity Critics and the Research 285 equity market. In the boom period of 1999–2003 they accounted on average for under about 5 per cent of deal numbers and less than a quarter of deal value across Europe. Even after something of a resurgence from 2017, in 2018 these P2Ps accounted for 2 per cent of deal numbers and almost 16 per cent of total deal value in Europe. In contrast, the largest single source of deal numbers across Europe has traditionally involved buyouts of private/family firms, followed by divestments and secondary buyouts. The largest single source of deal value has traditionally been divestments by domestic or foreign corporations, though in recent years secondary buyouts have taken the top position. The extent of majority private equity stakes was once very much a function of the size of the deal, with larger deals having majority equity stakes held by PE firms. Today majority private equity ownership is becoming the norm even in smaller deals. What Happened to 'The Wall of Debt' and Is There a New One? Many commentators forecast that the debt raised by buyouts in the boom years would precipitate a secondary crisis when it came to be refinanced. This so-called 'wall of debt' to be refinanced was effectively dealt with by the market and did not cause the predicted problems. Low interest rates and 'pretend and extend', whereby loans are rolled over despite being behind the original plan, went a long way to alleviating and pushing the supposed problem into the future. An increasing appetite by banks, bond holders, and debt funds to grow their business lending books again has led to an increase in debt availability. Debt funds do not generally lend amortizing loans: their core product is a unitranche loan with a bullet repayment. Furthermore, cov-lite (which we explained in Chapter 5) also re-emerged. There is therefore still a 'wall of debt' to repay or refinance. We would caution that if this trend were to continue, problems may be created for the future. Is there a Lack of Consultation in Private Equity Owned Firms? Concerns about lack of consultation with workers relates to periods both prior to and after a private equity acquisition. This criticism gets caught up with the TUPE issue we discussed earlier. Because private equity usually involves both a transaction and a change or refocusing of strategy, there are huge changes in the business, both real and perceived. It may well be good commercial practice to consult with some wider stakeholder groups about these changes, but there is no reason to believe that consulting in and of itself is socially desirable or effective and therefore should be a requirement. It is clear that a change of ownership necessarily entails uncertain times for many people. There is no evidence that we are aware of that the cohort of companies owned by private equity consult more or less than any other business in a similar change of ownership. Furthermore, we are not aware of any evidence-based consensus that such a consultative process is correlated with the economic and social outcomes of any investment or group of investments. If we take the consensus from the evidence bases on corporate mergers and acquisitions (M&A) and private equity, we arrive at a very different conclusion. It is widely believed that M&A by corporates tends to be unsuccessful in generating shareholder value. It is also, Downloaded from https://academic.oup.com/book/31976/chapter/267729015 by King's College London user on 22 October 2023.

[Audio] 286 Private Equity Demystified less strongly, believed that private equity has generated returns higher than those of quoted companies. Therefore, the question for research is not whether PE-style transactions should change their management approach; rather it is why are corporations worse at mergers and acquisitions than private equity investors? Is There Tax Avoidance and Why Are Tax Havens Used? There are two threads to these criticisms. The first revolves around the deductibility of interest paid on loans borrowed to fund buyouts. While the position varies from country to country, the general position is similar. Whereas in the past most interest was de ductible, for many years in most countries this has no longer been the case. All tax authorities acted to stop abuse by using excessive levels of debt. The critics who raise this argument are often apparently unaware that authorities acted to deal with the issue many years ago. The second, more general criticism is that both investee companies and the private funds themselves adopt artificial and convoluted structures to reduce tax in ways that are legal but not available to others, and therefore unfairly favour private equity. This is wrong in detail. Many of the apparently artificial structures have nothing to do with tax. They are designed within the confines of countries' laws to manage liabilities as well as taxation. There are no particular arrangements available to private equity funds that are not also available to others. Therefore, the debate about offshore and international taxation is a manifestation of a more general debate, outside the scope of this commentary, about the taxation of corporations and individuals generally. Our only observation is that the critics do not seem to be arguing that any laws are being broken. They appear to be arguing that the laws are wrong or wrongly interpreted. That is surely a matter for politicians and legislators. Businesses are not responsible for the regulatory framework, nor should they be. Is there a Misalignment of Incentives? Not all of the critics are ideologically opposed to the industry. Criticisms concerning misalignment of incentives have arisen from among those actively involved in private equity. The central assumption of private equity is that shareholders' interests should be the primary concern of the management of any company. While it may sound controversial to some, this is simply a restatement of the basic responsibilities of any director of a 'for profit' limited company. The shareholders own the business and management are duty bound to act in the interests of the shareholders, subject to the constraint that they must not trade insolvently and must observe the various rights of employees, customers, and other groups. There are those who believe that businesses should have wider objectives— indeed in the UK these are entrenched in statute. But there are no significant differences between PE and non-PE businesses in those respects. Equity illusion. As we described, management of portfolio companies may suffer from 'equity illusion'. They may hold a significant proportion of the equity of the business (a large 'equity percentage'). However, they may have so much investment ranking Downloaded from https://academic.oup.com/book/31976/chapter/267729015 by King's College London user on 22 October 2023.

[Audio] Private Equity Critics and the Research 287 ahead of them that has to be repaid before any value is shared by the equity that they cannot real is tic al ly accrue any value in their apparent equity stake. In this scenario, management are no longer aligned with the private equity sponsors. This misalignment arises where investors take a priority yield that may effectively appropriate equity value to the private equity fund. Time value of money. Management teams are typically interested in the absolute amount of capital gain whereas private equity funds may target a return on their investment. This can create differences in exit strategy between shareholders and managers due to the time value of money. Fund lifetimes and the mechanics of carried interest may also create differences in the exit preferences between investors and management. Funding acquisitions. Acquisitions often require further equity funding. Where this dilutes management equity or puts instruments that have a priority return to equity into the capital structure, incentives may change. Credit default swaps. Hedging techniques have created potentially perverse incentives for pur chasers or holders of debt in distressed companies. Where loans are publicly traded, pur chasers of loans that are 'guaranteed' using credit default swaps may be incentivised to bring about a loan default rather than avoid one. They may therefore be incentivised to induce failure. At the Fund Level Conflicts of Interest and Value Extraction At the fund level there are criticisms of the potential conflicts of interest that arise when funds have strong control of the underlying investee companies and low controls on their actions from their limited partners. The argument is simple and logical. Private equity funds control the companies they acquire. Due to the partnership structures used in funds to limit investors' liability, the fund managers are not controlled in a similar way by those investors. LPs simply cannot have any management controls without risking losing limited liability. This creates the possibility that fund managers can operate in a 'black box' and extract value from investments in a way that benefits their business interests, not their investors. This is not a theoretical risk. It has been found to have happened in high-profile funds in a number of countries. Significant fines have been paid as a result. It is argued that reputational risk will limit these behaviours. LPs will not invest in funds that they think will abuse their relationships. This is logical but is not supported by any comprehensive research we know of. In part this is because there is very poor data on private equity fund failure. It takes many years to unwind a dying portfolio and the research on the secondary market in zombie funds is very thin indeed. Historical Performance is Misrepresented We have already described at some length the issue around performance measurement at the fund level. Surprisingly little is published about performance at the individual investment level. Downloaded from https://academic.oup.com/book/31976/chapter/267729015 by King's College London user on 22 October 2023.

[Audio] 288 Private Equity Demystified The data that exists is reasonably clear. Gross performance has exceeded most alternatives that investors might have invested in, but that comes with a significant lack of liquidity that carries risks. Performance after fees is obviously lower and the trend seems to be that it is falling and compressing. Both the average fund performance and the variance of returns seem to be falling. However, private equity funds are hard to assess as they are investing, and therefore all analysis is always incomplete. IRR is a poor measure of performance and is widely abused in marketing materials. It is however deeply embedded in the private equity discourse, not least because carried interest is usually paid after achieving a hurdle expressed as an IRR. The appropriate yardstick for any individual potential investor is their opportunity cost, measured by comparing what they would have earned had they not invested in private equity. This results in an array of public market equivalent indices. The data on these is still poor, but the published research still shows PME outperformance in the past. There is a debate about which index to use that highlights the real underlying issue: investment decisions cannot be distilled into single figures, no matter how compelling the narrative that the index creates. Valuation of Unrealized Investments Is Manipulated Private equity managers are fund managers who seek to raise a series of funds. Due to the long-term nature of the funds and the unquoted nature of the investments made, the ul tim ate returns on any fund are not known until the fund is fully realized. This will become clear long after the usual six-year investment horizon. Therefore, the valuation of the unrealized investments in any existing fund will be an important influence on the decision of existing and new investors looking to invest in any new fund a manger is raising. There is therefore a material incentive to flatter the returns of unrealized fund investments when fund raising. There is some evidence that this occurs but other evidence to suggest that valuations are excessively prudent when compared to realized exits. In a small minority of funds fees are paid on the value of assets, not their cost, giving another incentive to overvalue. Most funds will have their valuations audited, but it is the responsibility of the dir ectors, not the auditors, to value the assets. More work needs to be done. Fund Level Fees Are Excessive Investors in private equity have been vocal in their concern that the original tightly aligned model of the industry has been materially weakened as funds have become larger and managers have become multi-fund managers. Whereas a small PE fund relies heavily on sharing in capital gains to generate wealth for its partners, large multi-fund managers may be more motivated by the fees generated than the outcomes achieved. Fees have become larger as funds have grown, and the excess of fees over fund costs has grown in absolute terms, providing a higher guaranteed income to the manager and, therefore, higher profit to its partners. Therefore, there is an incentive to maximize the fund size (consistent with the investment opportunities for the fund) in order to increase the management fee income. Critics have argued that as fund size has grown, the funds' costs have grown less rapidly.

[Audio] Private Equity Critics and the Research 289 and therefore the profit from fee income has become more material. It is argued that this income, which is effectively guaranteed, has created a misalignment between the partners in private equity funds and their investors. In essence a new principal–agent problem is said to have been created by the high levels of guaranteed income from fees. There is some evidence that is consistent with this criticism. Transaction Fees These fees which are payable by investee companies to the fund ('arrangement fees'), as opposed to fees payable to transaction advisers, represent inefficiency in the private equity market. Investors' money is invested into a transaction and immediately repaid to the fund managers and/or the fund. Increasingly investors are putting pressure on fund managers to direct these fees to the fund, not the fund manager. This is in effect a subset of the more general criticism of the 'black box' relationship between fund managers and their investee companies. Is There Sufficient Permanent Capital in Private Equity Funds? There were concerns regarding the minimum regulatory capital requirement of fund structures. These were largely misplaced as industry norms for ten-year commitments ensured funds were 100 per cent equity backed. The concern was more appropriate for non-private equity funds, and indeed once clarity over the difference in fund structures was understood, the regulators incorporated changes to acknowledge the differences between most private equity funds and, say, hedge funds. It was a good example of a problem that seems to have abated: journalists and commentators now rarely conflate private equity and hedge funds. They are totally different ways of generating returns. They are no more alike than swimming and skating are similar ways of making a journey across water: liquidity makes all the difference! Does Private Equity Create Systemic Risk? A long-standing criticism dating back to the first private equity wave in the 1980s is that the higher leverage in PE deals was likely to have adverse systemic implications. The tradition al private equity fund structure operated to limit systemic risk by offering long-term, illiquid, unleveraged investment assets to investors with large diversified portfolios. The private equity industry did generate increased demand for debt during the second PE wave. However, the contribution of industry to the market failures seen in 2007–8 arose through failures in the associated acquisition finance banking market, not within the private equity fund structures. Pressure to increase leverage within funds and to provide liquidity to investors has, as we predicted in the third edition of this guide, led to geared private equity funds. The use of subscription lines and NAV loans does increase risk in the fund. However, LPs did not have to cash collateralize their commitments and could raise leverage against their holdings in any fund in the past. Therefore, the growth of fund level debt only Downloaded from https://academic.oup.com/book/31976/chapter/267729015 by King's College London user on 22 October 2023.

[Audio] 290 Private Equity Demystified increases risks if it increases the total amount of debt in the system. This is monitored by central banks and regulators but is very difficult to accurately track. Do Debt Funds Increase Risks? The emergence of debt funds that are leveraged, have no amortization requirements, and will lend blended mezzanine and senior debt is a new phenomenon that is almost wholly unresearched. On the one hand the reduction of lending by systemically important banks to private equity should assuage the critics. On the other the investors in debt funds include institutional investors some of which are systemically important, such as pension funds and insurance companies. The concern is that this lending is outside the banking regulations that constrain deposit-taking banks. Until interest rates rise, liquidity is disrupted and/or recession comes, there is no data to illuminate this debate beyond speculation and projection. Is There a Culture of Secrecy? There are concerns about a lack of public information on the funds and their investors. If private equity funds intended to be secretive, they have been very poor at achieving it. The number of papers on private equity in academia goes back to the early 1980s and continues to grow. Similarly, the public commercial data sources are extensive and growing. The level of interest has tracked the growth of the industry, just as it would in any similar growth area with reported high returns. Doubtless some organizations and individuals have raised their profiles and with it that of the industry in general. However, it is our contention that private equity was not secretive but simply not forthcoming with information to a largely uninterested public. This was not due to any strategy to avoid openness, but rather due to the absence of any communication strategy at all with the wider public. In an industry that has grown from a few small transactions in the 1980s to many global fund managers in less than forty years, it is not surprising that an information void appeared. This void is being filled rapidly both by regulatory data disclosure requirements and commercial organizations and research groups, but still exists. Is there Overpayment of Executives? There are widespread criticisms of the compensation of partners and staff of the funds. The criticism is that people are paid too much and that it cannot reflect the real economic worth of those individuals. There are two separate issues to consider in this criticism. Firstly, there is the return to the founders of the private equity companies. This reflects the reward for establishing and building major global financial institutions in less than a generation. Second, and unrelated, is the return to those who joined the firms when they were established and successful. Downloaded from https://academic.oup.com/book/31976/chapter/267729015 by King's College London user on 22 October 2023.

[Audio] Private Equity Critics and the Research 291 Is There a Misalignment of Incentives? At the fund level, there are a number of other circumstances where the interests of the various parties in a leveraged transaction may not be aligned. Zombie funds. As funds have started to 'fail', the incentives of the various parties have diverged, and some perverse incentives have emerged. Where a manager will not be able to raise a new fund and the investments will not generate carried interest, the motivation of the manager can be to do as little as possible for as long as possible, to keep earning fees. Late fund stuffing. As funds approach the end of their investment period, there is a strong incentive to invest committed capital. Finishing one fund accelerates the raising of new funds and incremental management fees for successful managers. It is also particularly intense where the fund is poorly performing or the likelihood of raising a new fund is low. If a fund is not performing the manager might as well take on a riskier project in the hope that it will turn the overall portfolio performance around. There is research to suggest that secondary transactions completed late in the investment life of funds show significantly lower returns than the overall population of PE-backed investments. This would be consistent with the 'late stuffing' conjecture. Do the Conclusions to be Reached about Private Equity Depend on the Evidence Base? What becomes clear from our review of the claims and counterclaims about private equity is that it is critical to be careful about the evidence base being used. The evidence base may be flawed or may apply to only a particular part of the PE market. The use of specific cases to draw general conclusions about the effects of private equity on employment and employee relations is self-evidently discredited. Further, some of the cases either did not demonstrate the problem being claimed, took a short-term perspective, or had little to do with mainstream private equity. In some cases, it is unclear what would have happened in the absence of the buyout, such as whether the business would have survived at all. It is particularly important to develop qualitative studies that take account of all relevant perspectives rather relying only on a managerial, private equity firm, employee, or trade union perspective. Not only may management and unions have differing perspectives, but employees may also have different perspectives from their erstwhile union representatives. With respect to more quantitative analyses, problems have arisen because in many jurisdictions performance data are not readily available for private companies. Where such data are used, they may be biased. Much of the US data refer to higher performing companies coming to market, and hence are disclosing data on their performance as a private firm in the flotation prospectus. Other sources relate to the larger end of the market which uses public debt and therefore produces bond prospectuses. Because of the difficulties in obtaining data on the performance of PE funds and portfolio companies, many studies have made use of proprietary databases. While these do provide rich access to data otherwise unavailable, it became clear that some of these were.

[Audio] 292 Private Equity Demystified flawed, for example in terms of measures used and whether or not data have been updated. This is an important issue because the impact is not simply a question of minor differences in the same direction of findings but directionally in terms of whether PE funds have under- or over-performed. The leading commercial databases, such as Preqin and Pitchbook, continue to invest to improve data accuracy and completeness. They are in fact major sources of information on the size of the missing data problem. Some other quantitative studies have sought to draw general conclusions about the performance of PE-backed portfolio companies when they are only referring to a part of the private equity market, such as larger deals or majority PE-owned MBI/IBOs. For the future, studies can do more to be clear about the limitations and boundaries of their datasets. Replication studies can also help build up a reliable picture. However, questions remain if significant parts of the market are still systematically omitted. In general, there is a greater need for representative studies covering the whole PE-backed buyout population that allows comparison with non-PE-backed companies after controlling for other factors as far as possible. Compared to the US, for example, the UK offers an im portant context where such studies are feasible, since accounting data are available on private companies generally and non-PE-backed buyouts can be identified. What Are the Areas for Further Research? Despite the extensive body of systematic evidence now available, further areas for research remain. The following represent a non-exhaustive list of areas warranting further examination: Performance and Returns Almost all work on fund performance could be replicated at the investment level to understand returns at a more granular level. The effects of changing fund structures, especially leverage in funds, on returns are not currently captured in the literature, nor is the growth of co-investing. What are the relative performance effects of buyouts involving private equity firms that are more or less actively involved in their portfolio firms? What are the relative contributions of different forms of innovation versus cost restructurings to growth and returns in PE-backed buyouts? How do buyouts funded by mainstream private equity firms differ from those funded by non-mainstream private equity firms in terms of their characteristics, performance, and survival? How do private equity firms' exit routes evolve over the economic life-cycle? To what extent and how are private equity firms shifting their attention to forms of primary buyouts in the light of evidence regarding the performance effects of secondary buyouts? There is no research to date on the performance of the large debt funds that have emerged. Is there a limit to the private equity ownership market and could it displace public markets? Is it realistic and possible that the future will have a majority of public companies who are quoted fund managers of privately owned trading businesses? Downloaded from https://academic.oup.com/book/31976/chapter/267729015 by King's College London user on 22 October 2023.

[Audio] Private Equity Critics and the Research 293 Deal Structures What are the drivers and impacts of deal financing by new types of funders, including cofundings between different types of funders? There is very little research of any kind on debt funds and their spread across the market. How does the industry respond to changes in the global tax regime? How agile are private equity funds when the regulators act to change the rules? Governance What are the most effective portfolio company board compositions in terms of the ex pertise of executive and non-executive directors for different types of private equity buyout? Size and diversity issues are also poorly researched in private equity. What have been the effects on employee relations and human resource management in PE-backed buyouts during and subsequent to the recession? In what types of cases have the impacts been positive and which have they been negative? To what extent are any effects down to the PE-backed buyout or to other factors? How has training provision changed for different groups of workers and managers following a buyout? What are the relative contributions of different forms of innovation versus cost restructurings to growth and returns in private equity backed buyouts? While we know there is extensive senior management turnover on buyout, we lack systematic evidence on the process of selecting a skill and cognitive balance of the senior team, integration with other senior management members, and success of replacement members. Process To what extent do private equity firms learn from their experience over time to enhance the effectiveness of their involvement in portfolio firms? To what extent and how do private equity firms adapt their investment approaches in the light of outturns from existing portfolio firms while they are in the process of still investing current funds? How does the process of information acquisition and analysis differ between private equity funds and acquisitive corporates? Does the PE process really reduce risk and generate returns? New Markets How does private equity enter new markets and what constrains investors from supporting new regional funds? Many firms have all the characteristics of funded deals but appear reluctant to pursue growth. How can funders, advisers, governmental agencies, etc. encourage them to grow, as a contribution to addressing national and regional growth shortcomings? To what extent are there gaps to fund buyout opportunities in particular regions and countries? What are the roles of cross-regional funding and government incentives in addressing such gaps? Downloaded from https://academic.oup.com/book/31976/chapter/267729015 by King's College London user on 22 October 2023.

[Audio] 294 Private Equity Demystified What role can private equity have in developing economies? How can the model operate where there are poor insolvency laws restricting the attraction of being a debt provider and poor capital markets limiting access to equity and exit opportunities? Secondary Markets: Debt and Equity What are the outcomes from secondary fund purchases at both the fund and underlying portfolio company levels? How do these outcomes compare with those associated with primary funds? There is almost no research that examines how liquidity grows in these opaque markets and what necessary conditions there are to enable the creation of these new markets. Political Environment To what extent is political and economic turbulence—such as Brexit and its (eventual) aftermath; populism of the left and right, etc.—presenting new conditions for the private equity market in terms of both opportunities and threats relating to deal sourcing, deal funding, and returns? Information Is it what you know, or who you know, that drives investment success? Is our conjecture that private equity should be analysed as an information/liquidity trade-off supported by the data? Downloaded from https://academic.oup.com/book/31976/chapter/267729015 by King's College London user on 22 October 2023.