The American presidential election is a little over a year away.  With Democratic candidates trying to drum up support, they are again looking at the financial services industry.  And, perhaps the most common target within the broad financial services industry is private equity. 

If one pays close attention, Democratic candidates have taken many shots at what they view are deleterious effects from private equity takeover.  For instance, leading Democratic candidate Elizabeth Warren has proposed new legislation, the Stop Wall Street Looting Act of 2019, targeting the way private equity is governed and requiring changes in some of the most lucrative business practices.  

Ms. Warren is not alone in her criticism of Wall Street.  Mr. Sanders, the Vermont socialist, is a very frequent critic of the private equity industry.  Sanders “faulted the leveraged buyout model employment the investment firms for causing [Toys ‘R Us] to fail, and asked executives whether it was a deliberate policy to load the company with debt.” 

A New Study on Private Equity Buyouts

With political candidates intensely interested in private equity again, a new study from professors out of Chicago, Maryland, Michigan, and Harvard found that, in their opinion, some companies that are targets of private equity may perhaps lose jobs when being subject to a private equity takeover. 

The authors examined thousands of U.S. private equity buyouts from 1980 to 2013.  A summary of their data follows.  In all, they studied 177,000 targeted establishments and of those, 6,000 matched buyouts. 

What did they find?

Source: SSRN

What They Found

Unsurprisingly, the authors found conflicting evidence.  Fascinatingly, the authors found that private-to-private private equity buyouts are correlated with statistically significant positive effects on employment.  That’s right.  In private-to-private private equity buyouts, they found that private equity boosted employment. 

Alternatively, they found that public-to-private buyouts were associated with a statistically significant decrease in firm employment.  No doubt the Democratic presidential candidates will focus on this result, while ignoring the other results. 

Source: SSRN

Criticism of the Study

Interestingly, when asked what he thought of the study, billionaire investor (private equity) Stephen Schwarzman had one major criticism of the study – they only looked two years out.  He argued that private equity buyouts have long-term effects that last far longer than the two years the authors considered in the study.   

Conclusion

Overall, the U.S. is entering another election season, and with it comes the typical bashing of the private equity business model.  A recent study provides further fodder to criticize the industry, with the authors arguing that buyouts of publicly traded companies by private equity companies leads to significant job losses compared to similar firms operating in similar economic conditions.  Supports of private equity, including the famous Mr. Schwarzman, have a different view on the effects private equity brings to the table.  Let the election-induced debate begin, again.

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Private equity, the darling sector of the financial world, is affected by lots of things.  Among the many important factors that influence private equity is one very critical factor – interest rates.

There are two things central banks around the world are doing that paint a rosy next two years for the private equity business – lower interest rates and more money printing.  The latter is addressed here.

How Do Interest Rates Affect Private Equity?

Before delving into the interest rate discussion, one needs to understand how interest rates affect private equity. 

Interest rates, both long-term and short-term, can affect private equity through the cost of loans.  There are two main avenues in which private equity firms invest – venture capital and leverage buyout – and both, particularly the latter, are heavily affected by the cost of borrowing.

When a private equity firm is involved in a leveraged takeover, the private equity firm typically has little financial capital.  Instead, they usually rely on debt.  Debt requires consistent cash flow to make interest payments, and when interest rates are higher, the likelihood of a takeover being profitable drops.  In private equity speak, the internal rate of return that the private equity firm strives for is lowered for every increase in the interest rate.

When Interest Rates Are Declining?

In practice, when interest rates are declining or low, debt is only one avenue through which private equity firms benefit.  Another effect comes through fundraising.  When interest rates are low, investors look for other ways to make money.  One such way is to put money in private equity investments.  Thus, low interest rates increase fund-raising activity.

What is Going on Now That’s Positive for Private Equity?

Having established that low interest rates are good for the private equity business, what is going on now that suggests the next two years will be good for private equity?

The answer: More money printing, to lower long-term interest rate costs.

The following figure has the balance sheets of nine central banks around the world. 

Notice anything?

Fascinatingly, virtually every central bank around the world is printing money.  The one exception to this was the U.S. Federal Reserve, which was shedding its Treasury holding.  In recent weeks, though, that has changed.

All of the nine central banks shown – Australia, Bank of England (BOE), Bank of Japan (BOJ), Canada, European Central Bank (ECB), the Federal Reserve, India, the People’s Bank of China (PBOC), and Russia – are all trying to keep short-term and long-term interest rates low to boost economic growth.  By acting in such a way, central banks are creating healthy conditions for private equity simultaneously.

Source: Econometric Studios, Trading Economics

Conclusion

Overall, with central banks around the world printing more money, the private equity business should be a heavy winner.  Unless a recession materializes, which would be highly, highly unlikely with the incredibly low interest rates pretty much everywhere, conditions for strong private equity performance over the next two years are quite good.

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Entrepreneurship is the engine for American economic growth.  Although sometimes a hindrance, higher education can play an important role in developing individuals that become wildly successful entrepreneurs.

The next two sections detail the top 10 undergraduate programs and the top 10 MBA programs for entrepreneurship.  Before looking, can you guess which universities show up on top?  Would you guess that most of the top 10 universities are Ivy League?  Are most American universities?  Take your guess now because the results follow. 

Top 10 Undergraduate Programs

The following figure has the top 10 undergraduate programs for entrepreneurship.  Drum roll please.  The top university for developing successful founders is Stanford University.  According to data out of financial data provider Pitchbook, a whopping 1,288 founders attended Stanford University.

In second place is another California school – the University of California, Berkeley.  The State of California college produced an amazing 1,235 founders.

Third place belongs to the first Ivy League college on the list – Massachusetts Institute of Technology.  As of writing, MIT had 1,012 success founders. 

Fourth place belongs to the king of Ivy League schools – Harvard University.  Coming out of the bleeding red university were 987 founders.

Rounding out the top 5 undergraduate programs is the University of Pennsylvania.  UPenn produced 910 successful founders. 

Other universities in the top 10 (the founder count is in parentheses) include Cornell University (796), University of Michigan (745), Tel Aviv University (694), the University of Texas (682), and the University of Illinois (563). 

Source: Pitchbook

Top 10 MBA Programs

This section focuses attention on the top 10 MBA programs for developing success entrepreneurs.  Would you guess that the same ranking for undergraduate programs would show up for graduate programs?  Perhaps some universities have better MBA programs for producing founders than do their undergraduate programs?  Here’s a look.

Fascinatingly, although not completely surprising, the top university according to the number of founders companies is Harvard University.  The Ivy League school has 1,446 founders that claim Harvard University as the school where they earned their MBA.

In second place is Stanford University.  Stanford counts 933 founders as graduates from its MBA program.  Overall, Stanford comes out quite good in both lists, placing first in its undergraduate program and second for its MBA program.

In third place is the University of Pennsylvania with 792 founders.

Rounding out the top 5 are MIT (538 founders) and Northwestern University (529 founders).

The other members of the top 10 include (founders count is in parentheses) INSEAD (527), Columbia University (508), University of Chicago (494), the University of California, Berkeley (417), and the University of California, Los Angeles (302). 

Source: Pitchbook

Conclusion

In a fascinating look at success entrepreneurs, some universities produce some very success business founders.  The most successful undergraduate school for business founders is Stanford University, while the top ranking for MBA programs goes to Harvard University.  May entrepreneurship continue to be an important component of the American economy.

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The Winners in the 2019 Rise in Valuations

September 3, 2019

In the venture capital and private equity universe, valuations are what matter.  Valuations determine, at least on paper, whether fund managers are doing their job and thereby whether their performance justifies further investments.  Given that 2019 has seen a fair share of massive valuation increases, the question here is as simple as possible – Which […]

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Venture Capital is Getting Huge

August 19, 2019

Venture Capital Fundraising According to data out of private equity and venture capital data provider Pitchbook, the first half of 2019 saw quite robust fundraising.  Although slightly slower than 2018’s massive fundraising year, the first half of 2019 saw almost $21 billion in total funding raised.  Behind the $21 billion were 103 funds closed, 9 […]

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The Booming VC World in Q2 2019

August 5, 2019

Venture capital (VC) investment is booming.  After a record year in 2018, many analysts thought 2019 would be a letdown.  There would be no way that VC could even come close to the massive 2018 investing.  Well, that view has changed.  A look at the state of VC activity in the U.S. follows. VC Pulls […]

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Private Equity Becomes a Political Issue – Again

July 23, 2019

If you’ve been around the private equity industry long enough, you know that presidential elections bring up strong feelings on the issue.  Based upon what has been said in the past couple of weeks, the private equity industry is again a lighting rod for political posturing.  A look at what some of the recent comments […]

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Startups Becoming VCs Themselves

July 8, 2019

When one thinks of a firm involved in mergers and acquisitions (M&A), the idea of a startup generally does not come to mind.  Rather, when most people think of M&A, they likely think of large, multi-national corporations acquiring a company that has been through multiple rounds of funding and has proven successful at its craft. […]

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A Look at Average Salary Increases in PE, VC, and CVC

June 24, 2019

Average salaries in the private equity (PE), venture capital (VC) and corporate venture capital (VC) are generally high compared to other professions. How well did industry pay do last year and what is expected this years?  A look follows. Average Pay Growth in PE, VC, and CVC What is expected to happen with average pay […]

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The Top 10 Years for Financial Employment

June 10, 2019

The last couple of years have been good for the financial industry.  Financial industry employment is up 1.8 percent since the end of 2017.  Not the strongest growth rate – that title belongs to Natural Resources, Mining, and Construction at 5.8 percent – but stronger than Trade, Transportation, and Utilities, Retail Trade, and Information. The […]

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