Selected Publications

Title & Author(s) Abstract

"On the Valuation of Venture Capital and Private Equity Securities"

Klaas P. Baks, Gabriel D. Carroll & Andrew Metrick

2008

Venture capitalists typically receive preferred stock when they invest. This preferred stock comes in many flavors and can include many different features. The resulting securities can be modeled as a portfolio of options with unknown expiration dates, with these expiration dates possibly correlated to underlying firm value. These securities can provide a significant premium to plain common stock, but past solutions for this premium are either unwieldy or require unrealistic assumptions. In this paper, we derive closed-form solutions for the value of VC securities using a flexible functional form that allows for a wide variety of realistic assumptions for the key parameter values. We then take this solution to the data and estimate the expected premium above common stock for typical VC securities. We find that this premium can be substantial, with estimates between 20 percent and 60 percent for the most common types of transactions.

"The Decision to Go Private"

Bo Becker & Joshua Pollet

2008

Several theories have been proposed to explain the flow from public to private equity ownership. By studying the propensity of individual firms to become private during the previous few decades, we attempt to distinguish between the various theories. Firm size, risk, valuation, growth, and profitability all predict the decision to go private, consistent with many plausible theories. We find support for several specific explanations of buyout volumes, including the importance of junk bonds, the supply of private equity, the impact of Sarbanes-Oxley, and the risksharing benefits of public ownership. However, we do not find evidence that the break up of conglomerates was a motivation for buyouts, nor does corporate governance appear to play a role in this decision.

"Constraint on the Control Benefits of Brokerage: Evidence from U.S. Venture Capital Fundraising"

Christopher J. Rider

2009

This paper investigates how the control benefits of a broker’s structural position are constrained by the perceived quality of actors a broker may represent in an exchange. I propose that brokers prefer to represent high quality actors but also that the value an actor places on representation is inversely related to the actor’s perceived quality. This tension implies that neither the actors that value representation most nor the actors that brokers would most like to represent are most likely to be represented by a broker. I also propose that this quality constraint on the control benefits of brokerage is mitigated by the matching of reputable brokers with high quality actors. Empirical analyses of U.S. venture capital fundraising support the theory. The likelihood that a broker represents a firm’s venture fund first increases and then decreases with three different quality indicators: fund size, firm experience and firm status. Firms of greater perceived quality are also represented by more reputable brokers.

"Embedding inter-organizational relations in organizational members' prior education and employment networks"

Christopher Rider

2009

This paper proposes that organizations leverage members’ prior education and employment networks to identify and select new partners. Mechanisms related to embeddedness, homophily and focus theory imply that the likelihood of two organizations forming a new relationship increases with the number of prior education and/or employment affiliations shared by the organizations’ members. Analyses of U. S. private equity co-investments demonstrate that shared prior affiliations increase the likelihood of relationship formation. Consistent with embeddedness theory, this effect is strongest for organizations that previously formed few or no relationships. Implications for studying network evolution and the reproduction of socioeconomic inequalities are discussed.

"Risk and Expected Returns on Private Equity Investments: Evidence Based on Market Prices"

Narasimhan Jegadeesh, Roman Kraussl and Joshua Pollet

2010

We estimate the risk and expected returns of private equity investments based on the market prices of publicly traded funds of funds that invest in unlisted private equity funds. Our results indicate that the market expects the limited partners of unlisted private equity funds to earn positive abnormal returns of approximately 0.5% per year. We also find that the market expects listed private equity funds to earn abnormal returns that are statistically indistinguishable from zero after fees. Both listed and unlisted private equity funds have market betas close to one and positive factor loadings on the Fama-French SMB factor. Private equity fund returns are negatively related to the credit spread and positively related to GDP growth. In addition, we find that the returns of publicly traded funds of funds and listed private equity funds predict changes in self-reported book values of unlisted private equity funds.