Jeff Hooke Private Equity Copenhagen CFA Society. June 20, 2016

Transcription

1 Jeff Hooke Private Equity Copenhagen CFA Society June 20, 2016

2 Background 2 US leveraged buyout (LBO) private equity (PE) funds have $700 B in equity under management or committed. VC and debt funds $ LBO fund marketing claims Higher returns than S&P 500 Lower volatility than S&P 500 Diversification away from U.S stock market. Public policy concern: state employee pension funds have committed $ B to such funds, paying very high fees. Are the marketing claims true?

3 Research Complications - Data 3 PE data services cover just 60% of the fund universe. Survivorship bias hard to prove. True IRR of an LBO fund only available when fund fully liquidated (10-12 year life). Since 2007, IRR s consist of 40% realized investments and 60% unrealized (unsold) investments. Unsold holdings are marked to market by fund managers themselves; perhaps 20% of holdings reviewed fully by independent appraisers. Thus, fund managers grade their own homework.

4 Research - Returns 4 Less than a dozen studies on returns. Consensus: since 1984 ( 32 years) there has been a return premium over S&P 500. Notable researchers: Kaplan (Chicago), Brown (North Carolina), Harris (Univ. of VA), and Jenkinson (Oxford); Phalippou (Oxford) and Gottschalg (HEC - Paris) Recent studies: last 10 years, however, no S&P 500 premium (Kaplan et al; Hooke/Yook) for buyouts.

5 Literature 5 Summary of Literature Review Alpha Data Source 1 Vintage Years Covered 2 (S&P 500) 3 PME (S&P 500) 4 Kaplan and Schoar [2005] TVE Similar Phalippou and Gottschalg [2009] TVE Negative Similar Robinson and Sensoy [2011] Proprietary Outperform database Higson and Stucke [2012] CA Positive Outperform Phalippou (2012) Preqin Positive Outperform Driessen, Lin and Phalippou [2012] TVE Zero ----

6 Literature 6 Franzoni, Nowak and Phalippou [2012] Harris, Jenkinson and Kaplan [2013] Ang, Chen, Goetzmann and Phalippou (2014) Hooke and Walters [2015] Hooke and Yook [2015] Proprietary Zero ---- database Burgiss Positive Outperform Preqin Positive ---- State Pension Reports Prequin All funds not fully liquidated Underperform Mixed Mixed Brown, Harris, Jenkinson, Kaplan, and Robinson [2015] Burgiss Positive Outperform

7 Research - Data Issues - Replication 7 Another problem with return measurement is apples vs oranges comparison. LBO s: low-tech, cash-flow positive, low-leverage, moderate cyclicality. S&P 500: very different. Only about 25-30% of S&P 500 fit LBO profile With GW professor, developed a LBO replication model that selected a portfolio of common stocks that fit the profile, based on 20 years of transaction data. Model provides useful benchmark index for LBO funds. Apples to apples, published in Journal of Indexes. We didn t add more leverage to public stock portfolio, although that would add to comparison.

8 Return/Volatility Smoothing? 8 Beta of Hooke/Barnhill public replication index is about 0.9 If you add extra leverage to the rotating public firms in the index, in order to simulate an LBO debt load, the beta climbs to perhaps 1.5 However, US LBO funds, in the aggregate, report volatility of returns that is below the S&P 500, despite the high leverage of the underlying portfolio firms. This seems illogical. Much of the return, on a year to year basis, is the LBO fund managers estimate of residual values in a given fund.

9 Volatility of LBO Returns-Smoothing? 9 LBO funds claim lower volatility vs. S&P 500, but underlying assets are more levered. LBO std. deviation is lower. Evidence of smoothing by LBO fund managers. Year S & P 500 Prequin U.S Buyouts Unlevered Replication Model 2001 (11.9) (11.1) (10.7) 2002 (22.1) (6.8) (13.7) (37.0) (26.1) (24.4)

10 Research - Diversification 10 Underlying LBO portfolio firms similar to many U.S public companies, not true diversification? Diversifying into additional companies for sure. LBO portfolio firms are lower-tech than S&P 500, but much more levered than S&P 500. Not sure how to make the point on diversification shortcomings. Is there an the argument that LBO s are true diversification from U.S public stocks?

11 Top LBO Fund Families- Facts 11 Hooke and Yook evacuated top 18 LBO fund families, comprising 88 LBO funds, both liquidated and operating ( vintage years). Conventional wisdom is that top families are better, and that most score higher than average. Most alpha ( vs S&P 500) is in first quartile last 10 years for LBO funds. Fact: the top families beat S&P 500 about the same as small families, in terms of PME. Fact: Average quartile performance for 88 funds is 2.19, vs random selection of 2.50 ( divided by 4 = 2.50).

12 12 Thank you.