New Economist: Private Equity Funds Under the Loop
This is really a backtracking post but I wanted to note a recent paper by Andrew Metrick and Ayako Yasuda at University of Pennsylvania, The Wharton School, Department of Finance, hat tip New Economist. The paper takes on the economics of the private equity fund industry as the authors develop a model which estimates the expected revenue earned by private equity fund managers. More specifically, the paper homes in on what seems to be quite a contrast between venture capital funds and buy-out funds.
The following quote gives a reasonable view of the authors' research agenda ...
Do successful private equity managers earn higher revenue by setting higher prices, raising larger funds, or both? Do these strategies differ between venture capital (VC) and buyout (BO) funds? What can these strategies tell us about organizational economics of private equity funds? In this paper, we address these questions using a novel model and dataset.
And moving on to the conclusion ...
We find major differences between venture capital (VC) funds and buyout (BO) funds – the two main sectors of the private
equity industry. In general, BO fund managers earn lower revenue per managed dollar than do managers of VC funds, but nevertheless these BO managers have substantially higher present values for revenue per partner and revenue per professional than do VC managers. Furthermore, BO managers build on their prior experience by raising larger
funds, which leads to significantly higher revenue per partner and per professional, despite the fact that these larger funds have lower revenue per dollar. Conversely, while 31 prior experience by VC managers does lead to higher revenue per partner in later funds, it does not lead to higher revenue per professional. Taken together, these results suggest that the BO business is more scalable than the VC business.