What have been the most influential pieces of academic research and why?
“Steven’s early work on documenting how PE could improve productivity in companies, especially underperforming ones, was particularly important because it highlighted some of the tough decisions and trade-offs that need to be made in these situations. More recent work has built on this as academics, including Josh, have looked at the impact of PE on R&D and employment, and Sabrina Howell and her co-authors have looked at how PE investment affects areas such as healthcare, education and student loans – areas with a strong element of public good.
“This research has found that PE is very good at taking advantage of new opportunities, but that it also seems to be good at optimising against regulatory constraints. But there are many nuances here: it is naïve to think that PE is evil; in many cases it is the regulation that’s poorly structured. The other point is that in restructuring, there are often losers, and so the costs and benefits need careful consideration. For example, to keep hospitals open in rural areas, they need to be run sustainably to continue to treat patients, but it might not be possible to provide the most advanced services.”
Antoinette Schoar
“The research done on returns and performance has been helpful for anyone wanting to know how well PE is doing from a policy and benchmarking perspective. The research carried out by Ruediger Stucke back in 2011 was particularly useful because it demonstrated that the data most people were benchmarking against – from Venture Economics – had incorrectly low returns that were relatively easy to beat. That and other work has led to better databases and methodologies and, as a result, more accurate benchmarking.
“The research on companies by Josh, Steven Davis and John Haltiwanger has also been influential – it found higher productivity in PE-backed companies and job losses in some areas, but gains in others. The key here is that the sample size was large. Some negative findings in the popular press and in other papers have often been driven by the use of examples or smaller datasets. It’s important to get this right, especially for policymakers – academic research in this area should be looking at all deals, not cherry-picking. Also, it is very positive to have academics fight it out and review each other’s work – that’s how we understand what’s really going on and where positive and negative externalities might lie.”
Steven Kaplan
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“Steven and Antoinette’s research on public market equivalent (PME) returns has been enormously influential in the industry. Being able to compare public market and PE returns is essential, and yet before they developed the PME methodology, the area was underdeveloped. This research has changed practice in the industry and how investors think about PE in the context of public market returns.” Josh Lerner |
“I agree – the papers on understanding PE’s performance, including that on PME, have made a significant contribution to the industry. They have demonstrated that there is a need to triangulate different measures – not just IRR – to understand PE performance because, unlike in public markets, there is no silver bullet metric that easily captures this.
“However, I’d say the most influential paper to my mind is the Stucke paper mentioned by Steven because it was a bombshell. It demonstrated that one of the most widely used datasets had a significant downward bias because fund histories were incomplete. That had implications for the industry, but it also meant that academic research using this data had to be reconsidered, especially papers that had found PE to be underperforming public markets.
“Steven also makes a great point about not cherry-picking data. I’d add to this that there can be a tendency among some academics to extrapolate from limited data in private markets. That may be because the datasets are limited, but this shouldn’t be an excuse for over-reaching.”
“Related to this point is that academic research too often confuses average private investment performance with what investors can achieve. In public markets, there is a return dispersion of just 230 basis points between the median and top 5% returns from actively managed, long-only strategies. But in private markets, the dispersion is 10 times that amount. This gives investors an opportunity to significantly outperform the median through manager selection that just doesn’t exist in public markets. That point often gets lost.”
Richard Carson