Private Investment In Public Equity (PIPE)

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A Global Analysis of Private Investments in Public Equity

A Global Analysis of Private Investments in Public Equity

The time efficient manner and low issuance costs 1 of Private Investment in Public Equity (PIPE) has led to the emergence of PIPEs as an alternative way of raising capital. The capital raised via PIPEs is non-trivial. For instance, during 2001 to 2015 firms in the US raised approximately $243 billion via PIPEs, similar to circa $240 billion raised by similarly sized firms in US Seasoned Equity Offerings (SEOs) (Lim, Schwert and Weisbach, 2018). PIPEs have become a popular funding choice in the US since the early 1990s and surpassed SEOs in dollar volume and number of transactions during 1996-2006 in the US (Chen et al., 2010). Meanwhile, the rest of the world is catching up with PIPEs. For instance, during 2005 to 2015 the average annual deal value is $46 bn in the US, $29 bn in Asia and $35 bn in Europe, illustrating the increasing popularity of PIPEs for raising equity capital. Though, market frictions such as regulations and institutional frameworks can drive firms away from efficient investment and resource allocation which also inhibits economic growth and development (John and Senbet, 1998). In this paper we evaluate the market performance of PIPE issuing firms around the world and assess how varying institutional characteristics affect market valuation.
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A Global Analysis of Private Investments in Public Equity

A Global Analysis of Private Investments in Public Equity

The time efficient manner and low issuance costs 1 of Private Investment in Public Equity (PIPE) has led to the emergence of PIPEs as an alternative way of raising capital. The capital raised via PIPEs is non-trivial. For instance, during 2001 to 2015 firms in the US raised approximately $243 billion via PIPEs, similar to circa $240 billion raised by similarly sized firms in US Seasoned Equity Offerings (SEOs) (Lim, Schwert and Weisbach, 2018). PIPEs have become a popular funding choice in the US since the early 1990s and surpassed SEOs in dollar volume and number of transactions during 1996-2006 in the US (Chen et al., 2010). Meanwhile, the rest of the world is catching up with PIPEs. For instance, during 2005 to 2015 the average annual deal value is $46 bn in the US, $29 bn in Asia and $35 bn in Europe, illustrating the increasing popularity of PIPEs for raising equity capital. Though, market frictions such as regulations and institutional frameworks can drive firms away from efficient investment and resource allocation which also inhibits economic growth and development (John and Senbet, 1998). In this paper we evaluate the market performance of PIPE issuing firms around the world and assess how varying institutional characteristics affect market valuation.
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The Return on Private Investment in Public Equity

The Return on Private Investment in Public Equity

2 determine why sophisticated investors, including institutional investors and accredited individual investors, apparently overprice private placements in public equity. We use a comprehensive sample of 2,352 Canadian traditional private placements. This type of placement is a very popular source of financing for Canadian companies (Maynes and Pandes 2010), allowing for the analysis of a large sample of placements and for the estimation of the private investors’ return without the complex set of hypotheses required to estimate the investors’ return in structured PIPEs. To the best of our knowledge, the PIPE phenomena outside of the U.S. remains largely unexplored, with the exception of the liquidity analysis of Maynes and Pandes (2010), and a survey indicating that the long-run performance following these placements in Canada, for small venture issuers, appears to be low (Carpentier and Suret 2010). Hence our first contribution. Using a Fama-French Three Factor Pricing Model (TFPM) and risk premiums estimated based on the whole Canadian market, we evidence poor long-run returns following private placements in Canada. To track the source of this underperformance, we examine three non-exclusive propositions from former research on private and public placements: the risk explanation, the discount explanation and the over-optimism explanation.
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The Costs of Issuing Private Versus Public Equity

The Costs of Issuing Private Versus Public Equity

Smith (1993) conclude that private placement discounts are influenced by the costs incurred by private investors to resolve information asymmetry concerning the firm. In other words, when value is more difficult to ascertain, investors will expend more resources to determine value and will thus require larger discounts. Given that the PIPE process is less transparent than the conventional SEO process, discounts should be lesser for SEOs, as Ang and Brau (2002) contend. In the United States, most studies estimate PIPE discounts at between 9% and 20% (Hertzel and Smith 1993; Wu 2004), while Mola and Loughram (2004) estimate discounts at 3% for SEOs. Theoretically, the gross spread should be larger for PIPEs, because the investment bankers’ risk is greater in a less liquid offering. However, the workload and the risk of the investment banker should be lower in a quick process in which only a few investors are involved. Moreover, a significant proportion of PIPEs are implemented without investment bankers. These direct offerings can bear a larger discount, but the gross spread should be null. 2
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The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?

The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?

In addition to its sheer size, it is interesting to analyze the private equity market to help understand existing asset pricing issues. Consider the “equity premium puzzle” of Lars P. Hansen and Kenneth J. Singleton (1983) and Rajnish Mehra and Edward C. Prescott (1985). Resolutions of the high average return on public equity, which rely on homogeneous agents with very large values of risk aversion (e.g., John Campbell and John Cochrane (1999)), seem at odds with the fact that many households take on much larger risks in the private equity market without, on average, earning a higher return than the public equity return. In other words, unlike the equity premium puzzle documented in public markets, the returns to private equity investment appear far too low given their risk. If households require such a high expected return to take on the risk of publicly traded equity, why are they willing to invest substantial amounts of wealth in a single private company with a much worse risk-return trade-off? Should this be considered a “private equity premium puzzle”? More theoretical and empirical work is needed to determine if this is the case. What we hope to convince the reader is that a complete theory of household portfolio choice should emphasize both public and private equity. For example, John Heaton and Deborah Lucas (2000) argue that the additional risk of private investment and its correlation with public equity market returns may help explain why the (public) equity premium is so high. However, while it is standard in this literature to treat nonfinancial income as exogenous, our findings emphasize
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Determinants of Customer Based Brand Equity : A Study of Public and Private Banks

Determinants of Customer Based Brand Equity : A Study of Public and Private Banks

 Sangeeta Arora (2016) aimed that to identify the various determinants of customer-based brand equity in the banking industry and to verify whether these determinants vary across bank types. For this purpose, a structured questionnaire was developed and a sample of 120 respondents was taken from selected public sector banks and private sector banks of Jalandhar. Factor analysis produced six factors, that is, brand investments, brand performance, brand salience, brand verdict, brand feelings and brand unfamiliarity, which accounted for 73 per cent variance. The findings revealed that out of the six factors extracted from the study, brand verdict emerged as the most significant factor that led to the determination of customer-based brand equity. The results of independent sample t-test showed no significant differences in the perceptions of customers of public and private banks with respect to customer-based brand equity. Correlation analysis was also conducted on the study variables and the results indicated that there are strong, positive and significant relationships between brand performance and brand feelings, and between brand performance and brand verdict. The multiple regression results showed that only brand performance, brand salience and brand feelings have a significant influence on brand verdict, whereas brand investment had a significant negative impact on brand verdict.
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Public service or portfolio investment?? How private equity funds are taking over post-secondary education

Public service or portfolio investment?? How private equity funds are taking over post-secondary education

What steps would the trustees of a charity have to take to sell its assets? According to HEFCE’s Charity law expert, the sale of a college or unversity’s assets would need to take into account complex factors around brand, reputation and ‘goodwill’: ‘The assets of a charity are not just physical, but include intangible assets such as brand, reputation and potential— the charity’s “goodwill”. To maximize the value of any assets sold, trustees are obliged to take indepdendent financial advice. Goodwill is not easy to value, but the terms of the sale may need to include ‘overage’ provisions to secure for the charity a stake in foreseeable but hard-to-quantify increases in value. To reduce the risk of selling at an undervalue, an HEI’s trustees will need to consider such things as the value (the potential for increase in the value) of degree awarding powers, of university or university college title, and of the development value of land. The trustees will also need to consider how they will apply the sale proceeds in furtherance of the institution’s charitable purpose of advancing higher education for the public benefit. This might include funding research and/or providing student bursaries. In turn this may need changes to the objects or powers (with Charity Commission approval) its constitution.’ 33
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Private Equity and Long-Run Investment: The Case of Innovation

Private Equity and Long-Run Investment: The Case of Innovation

Ultimately, the nature of the changes in corporate time horizons associated with private equity transactions is an empirical question. In this paper, we present evidence about one form of long-run investment, namely changes in innovative investments around the time of private equity transactions. This presents an attractive arena to examine these issues for a number of reasons. R&D expenditures have typical features of long-run investments. Their costs are expensed immediately, yet the benefits are unlikely to be observed for several years: several studies of managerial “myopia” (e.g., Meulbroek, et al. [1990]) have examined R&D expenditures for this reason. Second, an extensive body of work about the economics of technological change documents that patenting activity and the characteristics of patents reflect the quality and extent of firms’ innovations, allowing us to measure firms’ innovative output rather than merely R&D expenditures. Since not all research expenditures are well spent, and some critics of major corporations (e.g., Jensen [1993]) suggest that many corporate research activities are wasteful and yield a low return, changes in R&D expenditures are more difficult to interpret. While the literature acknowledges that patents are not a perfect measures of innovation—for example, many inventions are protected as trade secrets—the use of patents as a measure of innovative activity is widely accepted. Moreover, unlike many other measures of corporate activity, patents are observable for both public and privately-held firms, which is important when studying private equity transactions.
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Measuring private equity returns and benchmarking against public markets

Measuring private equity returns and benchmarking against public markets

In particular, Rouvinez (2003) has proposed the PME+ method. This essentially applies the logic of the PME in a different way. In the PME approach, the cashflows are assumed to be identical between the PE fund and the hypothetical investment vehicle, with only the NAVs differing. As the IRR calculation is the same, this means that this difference in the NAVs drives the difference in between the estimates of returns. With PME+, a different hypothetical vehicle is constructed. This time the NAV of the PE fund and the PME+ vehicle are the same, and instead the distributions of the PE funds are adjusted by a scaling factor that ensures that the NAVs are identical. As these distributions represent investors ‘selling securities’ in the PME+ model, this makes sure that the PME+ vehicle does not end up having to ‘sell’ more securities than it actually owns. 20
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Private Equity Investment in High Growth Companies: Selection & Performance

Private Equity Investment in High Growth Companies: Selection & Performance

While both PEs and VCs make investments in companies not traded on a public exchange, they differ in their respective investment objectives, styles, and territories. Over the years, however, these differences between PE and VC investments have become somewhat blurred. One such example is that there has been an increasing interest of PEs in high growth entrepreneurial companies, which overlaps with investments that have traditionally been made by VCs. Using a sample of investments in entrepreneurial companies made between January 1990 and December 2014, this paper compares the investment characteristics of PEs and VCs in the growth equity space by looking at differences in investment round size and company
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Private equity and venture capital: investment fund structures in the Czech Republic

Private equity and venture capital: investment fund structures in the Czech Republic

fi nancial institutions is to increase fi nancial stability and to protect the sector of retail (non-qualifi ed) investors. Financial regulation thus applies to the activities of both commercial banks and other fi nancial institutions and to the asset management segment where the manager takes care of another party’s capital on a fi duciary basis. However, this concept of regulation is not suitable for the purposes of the PE/VC market because PE/VC funds focus on institutional investors who manage highly valuable assets, are managed by professional management, and have completely diff erent requirements than retail investors. Therefore, the regulation of activities of PE/VC funds cannot be put on the same level as that of other (collective) investments because PE/VC investments are not intended for the general, non-qualifi ed public. In the case of PE/VC funds, equity rather than third party capital is invested, and the requirement of appreciation refl ecting the business risk involved is required. Investors provide funds for the direct purpose of investment with a view to the PE/VC fund’s investment strategy, and not, as is the case in bank transactions, on terms and conditions known beforehand (e.g., as is the case of applicable interest rate), where the investor is unable to infl uence the application of funds.
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Restricted  Investment in Private Equity: The Volcker Rule\u27s Incursion Into Banking?

Restricted Investment in Private Equity: The Volcker Rule\u27s Incursion Into Banking?

iv) Global impact- the Dodd Frank Act was passed with the objective of causing a foundational change and achieving international conformity. But, the banks believe that this trend would only be deleterious to their business. Foreign banks and financial institutions from other countries can potentially take advantage of the limitations of their American counterparts to capture their industry and would be eagerly awaiting the opportunity to pick up customers and lines of business that American banks will be forced to abandon. 53 The Proposed Rule would also cause U.S. banking entities with foreign presence to incur substantial expense in rebranding and restructuring their public foreign funds, while foreign competitors would not be bound by such expenses or the restrictions globally and therefore would enjoy a clear cost advantage. 54 The Rule restricts U.S. banking entities' global operations, whereas it only restricts foreign banking entities' U.S. operations. 55 This will substantially damage the American Banks’ competitive strength in the global markets.
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Managing investment risks of institutional private equity investors: The challenge of illiquidity

Managing investment risks of institutional private equity investors: The challenge of illiquidity

22%. Cochrane (2001) uses data from more than 16’000 single venture capital transactions and calculates an arithmetic return of 59% with a standard deviation of 100%. More interesting data, at least from an asset allocation perspective, has been reported by Chen et al. (2002). By using IRR data of about 150 liquidated venture capital funds and by applying the maximum likelihood estimation technique explained in Section 2.2, they calculate an average venture capital fund return of 45%, with a standard deviation of 116% and a correlation with large capitalization stock’s returns of 4%. Finally, Rouvinez (2003) by applying a cash flow based method already explained in Section 2.2 finds an expected return on a private equity investment of 14% and a standard deviation of 34%. His methodology does not allow for calculating correlation coefficients with public market returns. Of course, these results may still be interpreted cautiously as they have been derived despite of severe data restriction problems. It will therefore still take a couple of years until reliable empirical results will be available. Nevertheless, it may become something like a stylized fact that venture capital returns are perceivably higher than returns on non-venture capital private equity investments. This seems to come along with a very much higher volatility as well as with a lower correlation to public equity returns. Given that future empirical research will corroborate this result, this will become an important issue in asset allocation decisions.
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Does the Tenure of Private Equity Investment Improve the Performance of European Firms?

Does the Tenure of Private Equity Investment Improve the Performance of European Firms?

The literature attempts to identify the influence of private equity investors on different measures of firm performance. For example, Kaplan (1989) investigates the operating ef- fect that 48 management buyouts had in the first half of the 1980s. He considers firms that were previously listed on the New York Stock Exchange and compares their perfor- mance before and after a large buyout: a transaction exceeding 50 million US dollars. His findings suggest a significant increase in operating returns. He claims that management buyouts generally bring positive improvements to the firm’s operations and increase its value. Smith (1990) finds that between 1977 and 1986, the operating returns of 58 public firms have significantly increased from its value year before completion of buyout and the year after. Lichtenberg and Siegel (1990) utilize a much larger plant-level database of 12,000 listed as well as unlisted manufacturing firms. As in the two previous studies, they also analyzed how pre-buyout performance, measured as total factor productivity, compares to that of the after-buyout period. They suggest that the productivity is supe- rior in the first three years after the buyout occurred, but differences vanish after the third year. Smart and Waldfogel (1994) apply a different methodology to 48 firms of Kaplan’s database, but come to the same conclusions that management buyouts have a positive effect on corporate performance.
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What private equity can learn from public companies

What private equity can learn from public companies

the investment by extrapolating data and putting it into context. This should not be a surprise to anyone given that “… only about 20 percent of the best managers have two top-quartile funds in a row and 30 percent are one-hit wonders.” 4 In fact, “top private-equity

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Private Equity and Long-Run Investment: The Case of Innovation

Private Equity and Long-Run Investment: The Case of Innovation

Ultimately, the nature of the changes in corporate time horizons associated with private equity transactions is an empirical question. In this paper, we present evidence about one form of long-run investment, namely changes in innovative investments around the time of private equity transactions. This presents an attractive arena to examine these issues for a number of reasons. R&D expenditures have typical features of long-run investments. Their costs are expensed immediately, yet the benefits are unlikely to be observed for several years: several studies of managerial “myopia” (e.g., Meulbroek, et al. [1990]) have examined R&D expenditures for this reason. Second, an extensive body of work about the economics of technological change documents that patenting activity and the characteristics of patents reflect the quality and extent of firms’ innovations, allowing us to measure firms’ innovative output rather than merely R&D expenditures. Since not all research expenditures are well spent, and some critics of major corporations (e.g., Jensen [1993]) suggest that many corporate research activities are wasteful and yield a low return, changes in R&D expenditures are more difficult to interpret. While the literature acknowledges that patents are not a perfect measures of innovation—for example, many inventions are protected as trade secrets—the use of patents as a measure of innovative activity is widely accepted. Moreover, unlike many other measures of corporate activity, patents are observable for both public and privately-held firms, which is important when studying private equity transactions.
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Typology of Public-Private Equity

Typology of Public-Private Equity

After noticing these gaps, the remainder of this Article matches each PPE type to the regulatory regime that is best equipped to manage these concerns. What I’ve shown from the discussion in Part III is that there are risks that are especially pertinent to each type of PPE. The primary concern of a public investor in PPE Type 1 is the conflicts of interest that may arise between the public investor and controlling investors, and the role of organizational laws in mitigat- ing such conflicts becomes paramount in PPE Type 1. The primary concern of a public investor in PPE Type 2 is the conflicts of interest that may arise between the public investor and its adviser, and the role of investment fund and investment adviser regulations in miti- gating such conflicts becomes paramount in PPE Type 2. Lastly, the primary concern of a public investor in PPE Type 3 is the accuracy of disclosures that will allow the investor to make an informed decision, and the role of securities regulation in facilitating such decisionmak- ing becomes paramount in PPE Type 3. This segmented view of the PPE universe facilitates the tailoring of regulations.
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The Impact of Domestic Public Debt on Private Investment in Kenya

The Impact of Domestic Public Debt on Private Investment in Kenya

One of the principal constraints on investment in developing countries is the quantity, rather than the cost of credit. The rates of return on investment in these countries typically tend to be quite high, whereas real interest rates on loans are kept low by governments for a variety of reasons (Note that Kenya’s economy is liberalized; therefore, interest rates are determined by demand and supply of funds). In such circumstances the investor cannot be expected to equate the current marginal product of capital to its service cost. Indeed, because the total amount of financing is limited and the price mechanism is not allowed to operate smoothly, it would seem legitimate to argue that the private investor in a developing country is generally restricted by the level of available bank credit. An increase in real credit to the private sector encourages real private investment as is confirmed by several empirical studies (Blejer and Khan 1984, Fry 1990, Tybout 2000).
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The Causal Relationship between Private and Public Investment in Zimbabwe

The Causal Relationship between Private and Public Investment in Zimbabwe

The study principally investigated the relationship between private investment and public investment with an assessment of the effect of the ESAP and unstable economic environment of 1998. The results from the unit root tests indicated that that the variables were integrated of the same order. Cointegration tests indicated one cointegrating equation, therefore, the use of a VECM model. The results from the VECM suggest that, in the short run, private investment is best explained by its lagged values while public investment is best explained by its lagged values and private investment to a particular extent. The flexible accelerator model was employed for both the private and public investment models. In the long run, macroeconomic instability was found to have inhibited both private and public investment. ESAP had a negative effect on public investment. However, the results from the Pairwise Granger Causality tests suggest that private investment granger causes public investment. These results do not entirely conform to the hypothesis of the study. The main reasons for this that can be raised are the rather abnormal conditions that existed in Zimbabwe during and after the economic instability. Also since these two types of investment are explained by other factors other themselves, the unexpected results act as a confirmation of this finding.
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Public Expenditures, Private Investment and Economic Growth in Togo

Public Expenditures, Private Investment and Economic Growth in Togo

Economic Growth 1990-1999: Political Crisis and On-Going Reform The period of 1990-1999 can be divided into two sub-periods: 1990-1994 and 1995-1999. The sub-period 1990-1994 can be seen as a period of Togolese strug- gle for democracy. During this period, most of the macroeconomic indicators have shown a serious deterioration. Public investment fell sharply (77%). The budget deficit and current account deficit rose respectively to 241% and 48% and the inflation reached 8%. This bad performance is explained by the fact that the democratization process in Togo has been particularly marked by social and po- litical trouble that peaked between 1992-1993 with a general strike for nine months, causing a deterioration of the economic situation which was exacer- bated by the suspension of cooperation of EU and other development partners. Consequently, the economy experienced a recession because of the drastic de- cline in private investment resulting from the reduction of domestic savings and the inability of the government to attract Foreign Direct Investment (FDI). There- fore, from 1992 to 1993, the growth rate of GDP per capita passed from −5.9% to −17.4%. This annual rate which is the worst during the three periods is, in a large measure, explained by the nine months strike that paralyzed the overall production system.
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