Raj & Kamla Gupta Governance Institute

Research

The Blurring Lines Between Public and Private Equity Governance

We often hear that public company boards are sophisticated. The regulations governing public company boards certainly help perpetuate this view. But public companies can learn from their private equity counterparts. In particular, private equity boards are often strong in pay for performance, the alignment of priorities is clear between managers and owners, and thorough analysis upfront followed by rapid execution is the operating standard. Such practices allow for the agility needed to respond to today’s dynamic market place and risks. There is a growing belief that public companies can learn from private equity oversight. We’ve compiled relevant, empirical research related to this trend below:

Mutual Fund Investments in Private Firms, forthcoming Journal of Financial Economics

By Sungjoung Kwon, Michelle Lowry, and Yiming Qian

Historically a key advantage of being a public firm was broader access to capital, from a disperse group of shareholders. In recent years, such capital has increasingly become available to private firms as well. 40% of venture capital-backed companies that had an IPO in 2016 had raised money from mutual funds before going public and research indicates that $10 million in mutual fund financing increased the probability of staying private for an additional two years by 36%. The full paper can be found here.

Venturing beyond the IPO: financing of newly public firms by pre-IPO investors

By Peter Iliev and Michelle Lowry

Approximately 15% of VC-backed firms raise additional capital from VCs within five years after going public. These financings are value-increasing for both the VCs and for the underlying companies. The firms average abnormal returns of approximately 6% in the days surrounding announcement and VCs earn abnormal returns of approximately 30 basis points per month over one year. The full paper can be found here.