2006 Vol. 2


Private Equity

Pansy Lin Yang, Executive Director, Center for Finance & Investments (Bio)
"This Hunting Season, No Elephant May Be Too Big." (NY Times, September 10, 2006) The ‘Elephant' in this case represents the next huge, multibillion "take private" buyout. This is but one of the many recent articles on private equity in the financial press. Private equity is a hot topic these days. Cash continues to pour into private equity firms, which are already overflowing with billions of dollars. Firms previously unthinkable as acquisition targets are bantered about as likely candidates for private equity firms on the lookout.

What exactly are the various forms of private equity and what value does each add to markets? What is it that makes private equity so powerful? Going forward, what are some of the obstacles and growth opportunities that private equity firms face, both in the U.S. and in foreign markets? These are just a few of the questions addressed in this issue.

Mark Garmaise, one of the young and talented assistant professors at UCLA Anderson, provides us with an academic perspective. Mark teaches a course on private equity and has done related research.

An interview with Bill Grabe, Managing Director with General Atlantic Partners, sheds light on private equity from a practitioner perspective. General Atlantic is a leading global private equity firm with a focus on investing in information technology businesses. In sharing his views, Bill brings a wealth of experience and expertise to the table. >>PLEASE SEND YOUR COMMENTS


In Theory ...
Why Private Equity Matters

Mark Garmaise, Assistant Professor of Finance
UCLA Anderson School of Management
(Bio)
Private equity refers to any form of stock investment in a firm that is not traded in a public market. Despite a dramatic drop-off in fundraising after 2000, private equity remains an important and robust sector of the U.S. economy. This article will explore both the role of the private equity industry in the U.S. and its prospects for growth internationally. >>READ PAPER

In Practice ...
Conversation with William O. Grabe

Managing Director, General Atlantic, LLC

What are your thoughts on current trends in the private equity community today?

Bill Grabe: I find the term "private equity" too broad and think it is useful to look at the industry in three different segments. The first is venture capital, comprising investors who focus on investing in companies at an earlier stage. The second is growth equity, which targets companies requiring capital for continued expansion. The third is leverage buyouts in which the focus is on using debt to purchase companies, typically involving large transactions. Historically, there has been fairly clear differentiation among the three types of financial providers in the private equity industry. However, a number of factors have changed the way private equity providers conduct their business, and today there is increasing overlap among them. >>READ INTERVIEW

CFI Book Club Recommends

The Money of Invention: How Venture Capital Creates New Wealth; Paul Gompers and Josh Lerner, Harvard Business School Press, 2001

Pioneering Portfolio Management: An Unconventional Approach to Investment; David F. Swensen, Free Press, 2000

Select Working Papers

Sensation Seeking, Overconfidence, and Trading Activity
Mark Grinblatt and Matti Keloharju

This study analyzes the role that two psychological attributes-sensation seeking and overconfidence-play in the tendency of investors to trade stocks. Equity trading data are combined with data from an investor's tax filings, driving record, and psychological profile. We use the data to construct measures of overconfidence and sensation seeking tendencies. Controlling for a host of variables, including wealth, income, age, number of stocks owned, marital status, and occupation, we find that overconfident investors and those investors most prone to sensation seeking trade more frequently. >>READ PAPER (PDF)

Dollar Cost Averaging
Michael Brennan, Feifei Li and Walter Torous

Dollar Cost Averaging is a strategy for purchasing equity securities that is widely recommended by professional investment advisors and commentators, but which has been virtually ignored by academic theorists and textbook writers. In this paper we explore whether the strategy is but another instance of irrational behavior by individual investors, or whether it is an investment heuristic that has survival value in an environment in which security prices exhibit mean reversion behavior that has only belatedly been recognized by academic theorists. Our evidence supports the view that the individual investors who follow this strategy in purchasing individual stocks to add to an existing portfolio are better off than if they followed the ‘rational'
strategies traditionally recommended by academics." >>READ PAPER (PDF)

Growth Options, Beta and the Cost of Capital
Antonio Bernardo, Bhagwan Chowdhry and Amit Goyal

We show how to decompose a firm's beta into its beta of assets-in-place and its beta of growth opportunities. Our empirical results demonstrate that the beta of growth opportunities is greater than the beta of assets-in-place for virtually all industries over all periods of time dating back to 1977. The difference has important implications for determining the cost of capital. For example, when choosing comparables to determine project beta one should match the growth opportunities of the project with those of the comparable firm. Assuming a 6% market equity risk premium, accounting for growth opportunities alters the project cost of capital by as much as 2 to 3%. >>READ PAPER (PDF)

>>VISIT THE FINANCE WORKING PAPER ARCHIVE

Faculty Spotlight

Walt Torous, professor of finance at UCLA Anderson, has been awarded the Lee and Seymour Graff Professorship. Professor Torous teaches real estate finance and managerial finance in Anderson's regular MBA, Fully-Employed MBA, and Executive MBA programs. He is an editor of Real Estate Economics, the official publication of the American Real Estate and Urban Economics Association. He was also the founding director of the Ziman Center for Real Estate at UCLA Anderson.

The Exceptional Finance Research Award in honor of Professor Mark Grinblatt was established recently by former UCLA finance Ph.D. students as a display of gratitude for his extraordinary contributions to finance and for being a respected teacher. The award will offer supplementary research support to outstanding advance-year finance Ph.D. students. Funds will support conference travel, data acquisition, or other research-related activities.

A distinguished faculty member and the holder of the J. Clayburn LaForce Chair in Management, Professor Mark Grinblatt has published approximately 40 papers in finance and economic journals spanning all areas of financial economics. He is also the author of a widely respected finance textbook. He is a former President of the Western Finance Association, and is currently a Director of the American Finance Association and an associate editor of several journals.

Donors
Kent Daniel
Bing Han
Juhani Linnainmaa
Toby Moskowitz
Selale Tuzel
Shu Yan

UCLA Anderson Welcomes Four New Finance Faculty ...

Marc Martos-Vila is an acting assistant professor of finance. Marc studies corporate finance, mergers and acquisitions, executive compensation, and the effects of financial frictions. Other areas of interest include contract theory, search theory and the links between finance and aggregate economic activity. He is completing his Ph.D. at Princeton University.

Jan Schneider is an assistant professor of finance. He received his Ph.D. from the University of British Columbia. His research interest focuses on asset pricing theory, in particular on the interaction of heterogeneous investors in financial markets.

Geoff Tate is an assistant professor of finance. He has primary research interests in the areas of empirical corporate finance and behavioral finance. He completed his Ph.D. in 2003 at Harvard University. Professor Tate has published papers in leading academic journals including the Journal of Finance. He also served as an Assistant Professor at the Wharton School from 2003-2006 prior to joining the faculty at UCLA Anderson.

Liu Yang is an assistant professor of finance. Her research interests include theoretical and empirical corporate finance in the areas of mergers and acquisitions, corporate restructuring, corporate governance, and financial intermediation. Liu formerly worked as a Senior Financial Analyst in the structured finance group in Federal Home Loan Mortgage Corporation. She completed her Ph.D. at the University of Maryland.

Alumni Spotlight

B. Kipling (Kip) Hagopian, ('66), is the 2006 recipient of the John E. Anderson Distinguished Alumni Award. Hagopian joins a prestigious group of prior recipients that includes John E. Anderson, ('40), president and founder of Topa Equities Limited; Eugene Rosenfeld, ('56), sole proprietor of Forest Lane Group; Jeff Henley, ('67), chairman of the board at Oracle Corp.; and Ric Kayne ('68), chief executive officer of the investment management firm Kayne Anderson Capital Advisors, L.P. Management. >>MORE

Streaming Video

Compliance with FAS 123 Richard Roll

Hybrid Funding Models for R&D
Eduardo Schwartz

Finance Seminars
Please e-mail for details.

October 6
Hanno Lustig, UCLA

October 13
Darrell Duffie, Stanford

October 20
Brett Myers, UCLA (Ph.D. Student)

October 27
Brad Barber, UC-Davis

November 10
Yuzhao Zhang, UCLA (Ph.D. Student)

November 17
Christopher Malloy, LBS

December 1
Dirk Jenter, MIT

December 8
Jonathan Berk, UC-Berkeley

Center for Finance & Investments
UCLA Anderson School of Management
110 Westwood Plaza
Los Angeles, CA 90095