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This paper aims to review, systematize and map the extant literature on private equity (PE) and study the underlying research agenda for investment selection and value creation in portfolio firms of PE investors. The PE investment process entails the preinvestment stage, where PE investors screen the target firms, and the postinvestment stage, where PE investors monitor the funded firms. With the motive to understand both stages, this review consolidates the findings of existing literature.

This research adopts a systematic literature review approach to study the underlying themes in PE investment literature. To adequately profile the key research areas, the authors have adopted citation classics in addition to keyword search and drawn the most significant papers in this field of research based on citation metrics.

The review presents a heterogeneous set of themes by encapsulating the relevant PE literature and identifies significant and emergent themes within the broad research area of investment and performance. The foundational themes found are selection determinants for PE investments, value creation in PE investments and selection vs value-adding effect of PE investors. While the emergent themes are the relative performance of PE investments; sources of value creation; skill, luck and social capital in PE; and resource dependency vis-à-vis PE. Each theme or subtheme chalks out the underlying research agendas for future researchers.

To build an understanding of the selection determinants and value creation, this review addresses the need to synthesize and align the PE literature concerning pre and post investment stages. PE is a fertile research area that is systematically captured in this review by identifying themes, subthemes and avenues for future research.

The authors analyze the equilibrium effects of non-tradable assets on optimal policy portfolios. They study how the existence of non-tradable assets impacts optimal asset allocation decisions of investors who own such assets and of investors who do not have access to non-tradable assets.

In this theoretical analysis, the authors analyze a model with tradable and non-tradable asset classes whose cash flows are jointly normally distributed. There are two types of investors, with and without access to non-tradable assets. All investors have constant absolute risk aversion preferences. The authors derive closed form solutions for optimal investor demand and equilibrium asset prices. They calibrated the model using US data for listed equity, bonds and private equity. Further, the authors illustrate the sensitivities of quantities and prices with respect to the main parameters.

The study finds that the existence of non-tradable assets has a large impact on optimal asset allocation. Investors with (without) access to non-tradable assets tilt their portfolios of tradable assets away from (toward) assets to which non-tradable assets exhibit positive betas.

The model provides important insights not only for investors holding non-tradable assets such as private equity but also for investors who do not have access to non-tradable assets. Investors who ignore the effect of non-tradable assets when reverse-engineering risk premia from asset covariances and market capitalizations might severely underestimate the equity risk premium.

The authors provide the first comprehensive analysis of the equilibrium effects of non-tradability of some assets on optimal policy portfolios. Thus, this paper goes beyond analyzing the effects of market imperfections on individual portfolio choices.

This study examines the relationship between managerial overconfidence and corporate financing decisions by constructing proxies for managerial overconfidence based on the track records of earnings forecasts in Japanese listed firms. We find that managers have the stable tendency to forecast overly upward earnings compared to actual ones and that their upward bias decreases the probability of issuing equity in the public market by about 4.7 percent per one standard error, which economically has the strongest impact on financing decisions. This tendency is observed when we employ alternative measures for managerial overconfidence and other model specifications. However, in private placements, the choice to offer equity is not always avoided by managers. This implies that managers place private equity with the expectation of the certification effect

The objective of this paper is to investigate the role of information asymmetry in the equity selling mechanisms chosen by the firms from an important emerging market, India. Specifically, the authors look into the choice between the two most popular mechanisms of equity issues – rights issue and private placement of equity.

This study introduces three analyst specific variables as proxies of information asymmetry as the conventional proxies are fraught with several disadvantages. First, the paper tests the choice between rights issue and private placement using a binary logistic model. In the second approach the authors use rights issue and segregate the private placements into preferential allotments and qualified institutional placements and test the impact of information asymmetry using a multinomial logistic regression.

The outcome of this empirical exercise shows that only those firms facing lesser information problems choose rights issue of equity. Private placements are chosen by firms facing higher information problems to circumvent information costs. The results remain invariant even after segregating the qualified institutional placements from private equity placement as the firms with information disadvantage choose to place equity privately.

In contrast to the conventional studies that focus on the debt-equity framework, the authors argue that the impact of information asymmetry is applicable even at disaggregated levels of equity selling mechanism.

Private equity has acquired multiple large nursing home chains within the past few years; by 2007, it owned 6 of the 10 largest chains. Despite widespread public and policy interest, evidence on the purported impact of private equity on nursing home performance is limited. In our review, we begin by briefly reviewing the organizational and environmental changes in the nursing home industry that facilitated private equity investments. We offer a conceptual framework to hypothesize the relationship between private equity ownership and nursing home performance. Finally, we offer a research agenda focused on the important parameters of nursing home performance: financial performance, and quality of care.

The purpose of this paper is to identify specific drivers of value creation in secondary buyouts. While this type of private equity deal has risen in importance in recent years, it is not yet well understood. Through an in-depth analysis of the acquisition of Brenntag by BC Partners, we develop propositions on the value creation profile of secondary buyouts.

We use a single case study design to explore the information-rich context of a secondary buyout. The Brenntag case epitomizes the development of a company from forming part of a large conglomerate to being private-equity owned after the primary and secondary buyout, to its final disposition of public listing. Our analysis is based on ten semi-structured interviews with key protagonists and observers, as well as analysis of primary company data and additional secondary data sources.

We propose that even if the investment management and monitoring skills of the primary and secondary private equity group are similar, there is still potential to realize operational improvements in a secondary buyout, due to either early exit of the primary private equity group or measures that further enhance management incentives. In addition, the Brenntag case shows that low information asymmetries can lead to higher leverage and that opportunities for multiple expansions are limited in secondary buyouts.

While a secondary buyout has become a common exit route in recent years, we are the first to undertake an in-depth case analysis of a secondary buyout. Our study helps researchers and practitioners enhance their understanding of drivers behind the value creation profile of secondary buyouts.

In the late 1990s, the market for private equity securities (hereinafter “private equity market”) was booming. From quarter to quarter, the number of venture capital deals and the amount invested rose dramatically. Certainly, much of this attention and excitement resulted from the extraordinary market gains experienced by some investors in private equity securities (hereinafter “private equities”). For example, in a book published in 2000, Randall E. Stross described a private equity investment that grew in value by 100,000 percent in less than two years. Today, the extraordinary gains of the late 1990s have subsided. Indeed, some commentators now describe market conditions as a “brutal hit.” The number of deals and the dollars invested are down, and as one commentator put it, there has been an “exodus of momentum investors.” Nonetheless, private equities remain an important alternative investment. Private equities also remain an important compliance area for broker‐dealers and investment advisers. This article reviews some of the compliance issues that could arise in the current environment. Specifically, it focuses on the types of issues that are likely to arise during an examination by the staff of the Securities and Exchange Commission (“SEC” or “Commission”). The article begins with a quick summary of the circumstances under which SEC examiners review broker‐dealers’ and investment advisers’ activities in the private equity market. Next it reviews recent SEC enforcement actions involving private equities and some of the compliance lessons that can be drawn from the cases. Finally, it discusses an examination initiative relating to private equities that the SEC currently has underway. It concludes that private equities remain an important compliance area and an important focus of the SEC’s examination program.

Recent corporate scandals have led to legislative and regulatory responses that significantly increase the monitoring costs and other burdens of becoming or remaining a public corporation. As a result, there has been a substantial increase in going-private transactions, particularly among smaller public companies. Acquisitions and minority equity positions that allow large corporations to join with smaller companies have also increased. The pressures to go private are not entirely new, however. This chapter offers evidence that the current wave of post-Sarbanes–Oxley (SOX) restructuring via private equity firms is not a radical shift, but a continuation of already-established relationships between drops in the broad index of publicly traded equities, and subsequent increases in going-private activity (with evidence extending back more than two decades). When publicly traded equity falls, two things make major contribution to an increase in going-private transactions:•With equity prices down, it becomes cheaper to buy back the stock.•For investors with cash reserves holding for the arrival of new opportunities, taking a company private at reduced cost offers an attractive opportunity.

The evidence also suggests, though, that the passage of SOX is associated with an increased intensity in this longer-standing relationship (in other words, SOX has strengthened the older trend).

This paper aims to deal with the issue of shareholder activism of private equity investors in public companies. The study identifies characteristics of target firms and investors related to the likelihood of private equity activism. The research also examines whether shareholder activism strategy of private equity investors is associated with the better performance in future and value creation of target firms.

The paper applies econometric modeling to hand-collected data on private equity investments in listed companies, in the form of private investment in public equity and open-market share purchases, from eight Continental Europe’s countries for the period 2005–2014.

The findings indicate that the probability of shareholder activism is higher if the target firm’s industry corresponds to the private equity investor’s industry specialization, if the private equity firm is older, if the target is larger and the average ownership share purchased by the investor is higher. Conversely, the probability of shareholder activism is lower where a private equity firm invests in the target for the first time. A target firm with an activist investor has poorer operational performance results one year following the investment compared to a target firm with a passive private equity investor.

Results from the analysis of transactions in Continental Europe countries with French and German legal origin may be not generalizable to other markets with the different legal tradition and institutional environment.

This research provides new empirical evidence on private equity activism in listed companies of Continental Europe. By distinguishing between active and passive investments, testing rarely considered characteristics to provide valuable insights and analyzing the effect of activism on the target firm’s performance, the study contributes variously to the still-limited body of literature on private equity activism in public companies with a governance structure based on concentrated ownership. The findings emphasize the relationship between shareholder activism and both target and investor’s characteristics from perspective of mitigating agency problem and value creation in target firms. By simultaneously investigating investments in public companies from several European markets, the study complements empirical evidence mostly obtained from studies of a single national market.

Since the initiation of the share split reform by the Chinese Securities Regulatory Commission (CSRC) in 2005, the private placement has become the major source of raising equity after IPO. The purpose of this paper is to investigate why listed firms in China prefer private placements compared to other options of raising capital.

The ordinary least squares regression, the piecewise regression and the cross‐sectional regression analysis were undertaken to investigate the determinants and characteristics of the seasoned‐equity offerings announcement effects. Probit regression analysis was taken to estimate the probability of a firm choosing private placements.

The authors find positive significant announcement abnormal returns for private placement. The findings also indicate that operating performance deteriorates immediately after announcement and poor operating performance is more likely to be contributed by large size portfolios, which suggests size effect.

The paper's evidence contributes to an understanding of the wider implication of the share split reform undertaken by the CSRC.

The paper provides insights for policy makers in China and around the world who have and wish to adopt similar practices within their jurisdictions. Similar research can be conducted in other emerging markets to enable better understanding and implications of seasoned equity offerings on firm financial performance.

The paper is novel in regard to the data and the wider research paradigm used.