Investors have bet big that you can get private equity returns in the public markets. A new study says otherwise.


Is it really possible to replicate the performance of private equity in public markets? A new study from the Wharton School at the University of Pennsylvania claims that is not the case.

According to study, by doctoral student Alexander Belyakov. He concluded that a “large portion” of the excess returns generated by private equity firms can be explained by differences in behavior between firms with and without private equity owners.

In particular, Belyakov argued that private equity support eases some of the constraints on the operations of holding companies, because they have owners who can “rescue” them from financial distress. “Private equity firms act like deep-pocketed investors: when the internal cash flows of their portfolio companies are insufficient to fully fund investments and/or make required debt payments, the private equity owner steps in and provides additional capital,” Belyakov wrote in the paper.

For example, he found that companies backed by private equity are willing to take on more debt and make large investments more frequently. These companies end up growing faster, which Belyakov attributes to better access to external financing. “Empirically, the numbers unequivocally support the conclusion that firms with private equity outperform firms without private equity,” he wrote.

The study comes as quantitative investors and other asset managers seek to deliver private equity-like returns through indices and equity funds. One of these companies is that of Dan Rasmussen Verdad Advisorswhich invests in small, cheap and leveraged stocks.

Although Rasmussen cautioned against drawing serious conclusions from Wharton’s paper, given his relatively small sample size and manually collected data, he agreed with some of the conclusions, including the role that add-on acquisitions play in private equity returns; and Belyakov’s conclusion that private-stock companies do not appear to deleverage during buyouts.

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The paper’s model of how cash injections in times of distress lead to different incentives for privately held companies is also “very interesting and merits further investigation,” Rasmussen said. “At this time, it’s a mathematical assumption, and it’s unclear how often it happens or how important it is to the bottom line. But this question would have interesting conclusions for both private equity and private credit. .

Belyakov based his findings on a quantitative model he built to analyze how expectations about financial distress can explain differences between firms with and without private equity. The paper also analyzed empirical data that Belyakov and his team collected manually on 407 takeovers in the UK, where private companies are required to file annual reports.

Based on the model and empirical analysis, Belyakov concluded that “abnormal returns [of] Private equity firms cannot be replicated by other investors.


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