Editor’s Letter

Cathy Scott General Manager and Publisher Private equity (buyout and venture capital) is perhaps the most controversial asset class. Not a week goes by without academic or industry reports criticizing the PE industry, practices, and performance. The PE industry is not without faults, and some of the criticisms are warranted. Many of the PE industry’s practices that are subjects of these criticisms are directly related to the investments’ nature. For example, IRR is the common measure of performance in the industry. This measure is not easy to interpret and is not directly comparable to the performance of public benchmarks. However, developing alternative performance measures has not been easy, and very often, they create their own ambiguities. For example, while PME measures make it easier to compare PE investments’ performance to publicly traded assets, they cannot be used in portfolio optimization algorithms. A common criticism of the PE industry is that the GPs may manipulate fund NAVs to embellish their intermediate performance. There is evidence of inflated NAVs, especially when a new fund is launched. However, this is not unique to the PE industry, and the same criticism can be levied against many other entities (public traded companies have been shown to manipulate their earnings). Agency problems and agency costs arise in many parts of the financial industry. Many practices of venture capital (VC) and buyout funds do deserve to be criticized, and the industry can take steps to correct them. Lack of transparency about fees, dividend recapitalization, and too much reliance on subscription lines of credit are just a few of those practices that the industry should address. The Journal of Alternative Investments has published many articles addressing these concerns. We are happy to begin this JAI issue with four excellent articles focusing on the PE and VC industry. Brown, Hu, and Zhang provide the first large-sample analysis of buyout and VC fund values in “The Evolution of Private Equity Fund Value,” where each fund’s performance is examined over its lifetime. The article examines interim fund investment multiples, internal rates of return, and direct alphas based on the current reported NAVs at each quarter of a fund’s life. Using a sample of 1,400 mature buyout and VC funds, the authors find that the typical fund experiences a falloff in returns after seven to eight years. The remaining performance is highly variable for funds of all ages, however, and the dispersion in returns also tends to increase after funds are about eight years old. They report that several fund-specific and market-wide factors affect future performance. For example, high dry powder levels tend to harm young funds yet benefit older funds. In “LBO and VC Investments in Recent Crises,” Stark and Lauterbach investigate the impact of economic and financial crises on the investment behavior and cash flow allocations of LBO and VC funds. Using a large sample of LBO and VC deals to analyze the resilience of investments in various industries, the authors examine volatility, maximum drawdowns, and investment returns. The empirical results show that LBO and VC funds withdrew capital from the most volatile industry sectors during the market and financial crises. The article’s findings extend crisis-related research b y gu es t o n O ct ob er 2 6, 2 02 1 C op yr ig ht 2 02 1 Pa ge an t M ed ia L td .