The Coller Prize has been an annual fixture of the Coller Institute of Private Equity for five years, recognising the best student research in the field of private equity and venture capital. To reflect the ever growing research in the field, the Coller Prize has expanded greatly since 2006. In 2008, the Institute awarded separate prizes for the best case study and best management report for the first time.
This year, the Institute introduced an additional category for PhD students, which is open to students from around the globe. A vast quantity of high quality submissions were received, making the judging process a challenging one.
This year’s Coller Prize award evening was held at London Business School on 30 November 2010. David Thorp (MSc04), Partner, ISIS Equity Partners and Chairman, Sussex Place Ventures, introduced the evening in front of a packed audience comprising current students, alumni, academics and private equity practitioners. Mr Thorp, an alumnus of London Business School and an experienced practitioner, discussed research in private equity and his own research on venture capital and start-ups when he was a student at the School. He gave Coller Capital as an excellent example of how to develop an entrepreneurial spirit by taking a concept and transforming it to be a successful secondaries fund of funds manager with truly a global reach. Within this context he stressed the importance and relevance of the work done by the Coller Institute as a leading research centre and forum for debate in private equity. Furthermore, I am sure his speech inspired a number of current students in the audience to get involved in private equity research!
Following the introductory speech, Professor Eli Talmor, Chairman of the Institute presented the awards for the Best Management Report and Best Case Study. Winners received a cheque for £1750 and a trophy. We are pleased to announce the following winners and runner-ups for these categories:
Best Management Report
Winner
Joao Estrela and Eze Vidra, both SEMBA 2010 for Real Money in Virtual Goods? A Venture Capital Scan on the Virtual Goods Industry
Runner-up
Amit Paul and Anupam Sharma, both MBA 2010 for Private Equity Secondaries – Investment Opportunities in the Cleantech Sector
Best Case Study
Winner
Adolfo Vinatea and Richard Turner, both MBA 2010 for Mekong Capital: The Importance of Corporate Culture in Emerging Markets Private Equity
Runners-up
Ananth Yvas Bhimavarapu and Thibaud Simphal, both MBA 2010 for Bridging the SME early-stage finance gap: A case study on Capital for Enterprise UK
James Marks and Pete Wong, both MBA 2010 for Catalysing Systemic Change: The Role of Venture Philanthropy
The awards were presented by Stephen Ziff, Partner, Coller Capital and the winners of both categories presented their papers to the assembled audience.
Professor Francesca Cornelli, Academic Director of the Institute presented the inaugural PhD prize. This is an important addition to the Coller Prize and reflects the objective of the Coller Institute to expand its reach beyond London Business School and recognise the world’s best private equity research, just as it does with its publication, Private Equity Findings. The winner received a cheque for USD 5,000 and a trophy.
The awards were presented to:
Winner
Ji-Woong Chung, currently of Ohio State University for Performance Persistence in Private Equity Funds
Runner-up
Linus Siming, currently of Bocconi University for Your Former Employees Matter: Private Equity Firms and Their Financial Advisors
Both winner and runner-up presented a synopsis of their papers to the audience.
The evening exemplified the growing quality of research in the field of private equity and venture capital. As private equity emerges from the financial crisis and the industry reflects on lessons learned during this period, research in the field will be critical on how the industry has been able to create and realise value, how GPs have interacted with their investors and the effect of new regulatory measures. As a leading forum for debate, the Coller Institute will continue to showcase the globe’s best private equity research, bridging the worlds of academia and industry.
Thank you to all involved in this year’s Coller Prize including a special thanks to Katharine Campbell, Cambridge Associates for her role in judging the case study and management report categories with Hans Holmen, Executive Director of the Institute.
All presentations will be made available for download on the Institute’s website at www.collerinstitute.com.
Wednesday, 1 December 2010
Thursday, 23 September 2010
The PE Performance Puzzle
Professor Chris Higson, Professor of Accounting at London Business School spoke at a seminar facilitated by the Coller Institute of Private Equity at City Week – the UK International Financial Services Forum.
Professor Higson’s speech addressed the puzzle relating to private equity performance. This speech was a follow up to his introduction in Issue 2 of Private Equity Findings to the article “The Point of No Return” which attempted to demystify whether private equity offers the outperformance necessary to compensate investors for illiquidity and risk. You can find a copy of the presentation and other research mentioned in this blog in our research library.
The issue of performance has become a question not only for investors but for broader society. While society is interested in whether private equity investors make businesses more valuable, in other words the gross returns to private equity, investors are interested in the net returns and how much of the return general partners (GPs) capture.
Chris Higson firstly summarised the various academic studies on the topic which looked at returns from buyouts from 1980 through to the early 2000s. Steve Kaplan, University of Chicago Booth School of Business and Antoinette Schoar, MIT Sloan School of Management obtained a large sample of US buyout funds using a Venture Economics database and assessed that average returns net of fees are roughly equal to the S&P 500. Ludovic Phalippou, University of Amsterdam and Oliver Gottschalg, HEC Paris, used a sample of global buyout funds, again obtained through Venture Economics. Their research showed returns are 3% below the S&P 500 and 6% below when adjusted for risk. Alexander Ljungqvist and Matthew Richardson, both from the NYU Stern School of Business, obtained timed cash flow data from a single limited partner (LP) and calculated returns to be an excess of 5 – 8% over the S&P 500.
Professor Higson pointed to the wide variation in performance between buyout funds, specifically noting that, based on BVCA figures, half of funds pay no carry and 10% of funds actually lose 50% of their capital. However, the top performers consistently do well and evidence suggests there is some persistence in top performing funds.
The measurement of private equity performance is difficult because there is no active market, unlike the market for quoted corporate acquisitions for which data is easily available. Furthermore, considering the way buyout funds are structured, it can take 10 years or more to wait for funds to exit their portfolio investments and pay out cash. To take the academic research mentioned above as examples, Ljungqvist and Richardson used data from a single LP, raising the question of selection bias where the other studies used data from Venture Economics which includes data on unrealised investments. Also, what is the appropriate benchmark? Chris Higson pointed to the S&P 500 as the default comparator but adjustments are required for illiquidity and leverage risk inherent in the private equity asset class.
So what is the research telling us? Chris Higson commented that despite the difficulties in performance measurement, the results are not inconclusive. Though we have to see research on private equity performance as work in progress, the evidence so far suggests an economy where private equity generates gross returns in excess of the market return but adjusted for fees, limited partners get at best a market return. GPs take most of the pie.
This begs the question – why do LPs continue to invest in the asset class when average returns are at best at market? If the top quartile funds consistently outperform then the remainder must be underperforming. The obvious answer is to invest only in the top quartile funds. However, this club is not easy to join. Chris Higson commented that the answer to this question continues to be a puzzle.
Professor Higson pointed to the 2 and 20 performance model and if GPs capture most of the economic rents through this model, the focus should be on performance attribution – what value the GP actually adds. Chris mentioned a recent study by Eli Talmor, London Business School, Florin Vasvari, London Business School and Oliver Gottschalg on this very topic. This research was able to access fund level cash flow data, net of fees for a single LP and attempted to quantify the outperformance of these funds compared with a public market equivalent (ie an ‘alpha’). In the sample analysed, buyout funds’ alpha was 4.47%. Leverage was the single highest contributor to returns, adding 7.71% to the return of the average buyout fund. LPs will look for their GPs to generate the highest possible alpha for them to justify their fees.
Looking to the future, Professor Higson believes there are two main drivers for PE continuing to maintain sustainable competitive advantage – better governance and possession of a powerful cluster of human capital with great intellectual capacity and strong networks. LPs will become more discriminating in respect of in which funds to invest and also will become more demanding. The industry will become smaller with the strong GPs surviving and thriving and the poor GPs falling away.
Professor Higson’s speech addressed the puzzle relating to private equity performance. This speech was a follow up to his introduction in Issue 2 of Private Equity Findings to the article “The Point of No Return” which attempted to demystify whether private equity offers the outperformance necessary to compensate investors for illiquidity and risk. You can find a copy of the presentation and other research mentioned in this blog in our research library.
The issue of performance has become a question not only for investors but for broader society. While society is interested in whether private equity investors make businesses more valuable, in other words the gross returns to private equity, investors are interested in the net returns and how much of the return general partners (GPs) capture.
Chris Higson firstly summarised the various academic studies on the topic which looked at returns from buyouts from 1980 through to the early 2000s. Steve Kaplan, University of Chicago Booth School of Business and Antoinette Schoar, MIT Sloan School of Management obtained a large sample of US buyout funds using a Venture Economics database and assessed that average returns net of fees are roughly equal to the S&P 500. Ludovic Phalippou, University of Amsterdam and Oliver Gottschalg, HEC Paris, used a sample of global buyout funds, again obtained through Venture Economics. Their research showed returns are 3% below the S&P 500 and 6% below when adjusted for risk. Alexander Ljungqvist and Matthew Richardson, both from the NYU Stern School of Business, obtained timed cash flow data from a single limited partner (LP) and calculated returns to be an excess of 5 – 8% over the S&P 500.
Professor Higson pointed to the wide variation in performance between buyout funds, specifically noting that, based on BVCA figures, half of funds pay no carry and 10% of funds actually lose 50% of their capital. However, the top performers consistently do well and evidence suggests there is some persistence in top performing funds.
The measurement of private equity performance is difficult because there is no active market, unlike the market for quoted corporate acquisitions for which data is easily available. Furthermore, considering the way buyout funds are structured, it can take 10 years or more to wait for funds to exit their portfolio investments and pay out cash. To take the academic research mentioned above as examples, Ljungqvist and Richardson used data from a single LP, raising the question of selection bias where the other studies used data from Venture Economics which includes data on unrealised investments. Also, what is the appropriate benchmark? Chris Higson pointed to the S&P 500 as the default comparator but adjustments are required for illiquidity and leverage risk inherent in the private equity asset class.
So what is the research telling us? Chris Higson commented that despite the difficulties in performance measurement, the results are not inconclusive. Though we have to see research on private equity performance as work in progress, the evidence so far suggests an economy where private equity generates gross returns in excess of the market return but adjusted for fees, limited partners get at best a market return. GPs take most of the pie.
This begs the question – why do LPs continue to invest in the asset class when average returns are at best at market? If the top quartile funds consistently outperform then the remainder must be underperforming. The obvious answer is to invest only in the top quartile funds. However, this club is not easy to join. Chris Higson commented that the answer to this question continues to be a puzzle.
Professor Higson pointed to the 2 and 20 performance model and if GPs capture most of the economic rents through this model, the focus should be on performance attribution – what value the GP actually adds. Chris mentioned a recent study by Eli Talmor, London Business School, Florin Vasvari, London Business School and Oliver Gottschalg on this very topic. This research was able to access fund level cash flow data, net of fees for a single LP and attempted to quantify the outperformance of these funds compared with a public market equivalent (ie an ‘alpha’). In the sample analysed, buyout funds’ alpha was 4.47%. Leverage was the single highest contributor to returns, adding 7.71% to the return of the average buyout fund. LPs will look for their GPs to generate the highest possible alpha for them to justify their fees.
Looking to the future, Professor Higson believes there are two main drivers for PE continuing to maintain sustainable competitive advantage – better governance and possession of a powerful cluster of human capital with great intellectual capacity and strong networks. LPs will become more discriminating in respect of in which funds to invest and also will become more demanding. The industry will become smaller with the strong GPs surviving and thriving and the poor GPs falling away.
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