Academic Highlights

Since our founding in 1998, GroveStreet has considered academic research as another lens for better understanding the private equity industry. Through market cycles and global crises over the past two decades, questions raised and insights gained from academia have helped GroveStreet maintain our steady, disciplined approach to our business.

To help navigate the dramatic changes that have accelerated in markets and in workplaces around the world, we have compiled recent academic literature tackling issues from private market cyclicality to diversity and environmental impact in investing. These works, both theoretical and empirical, share a fresh perspective on the complex issues facing investors in today’s uncertain environment. We hope that you enjoy this overview and welcome questions, comments and conversations about the research we’ve highlighted.

Gregory Brown (UNC Chapel Hill)

Robert Harris (UVA-Darden)

Wendy Hu (Burgiss)

Tim Jenkinson (Oxford-Said)

Steven Kaplan (U. Chicago-Booth, NBER)

David Robinson (Duke-Fuqua, NBER)

These authors ask whether investors can execute on an investment strategy designed to time the market with their private equity commitments. Results suggest that timing strategies for both buyouts and venture capital are largely impractical and produce minimal, if any, gains relative to the costs and reputational risks to the investor. While investors may control the timing of their commitments to funds, LPs cannot control when capital is called or returned. Even portfolios with diametrically opposed timing of commitments result in only slightly negatively-correlated calls and highly positively-correlated distributions. Leaving investment decisions to the discretion of the GPs mitigates much of the distinction LPs may seek from timing commitments.

The authors find that the best performing investment strategies optimize on manager selection and make commitments at a disciplined pace over time.

Sabrina Howell (NYU, NBER)

Josh Lerner (Harvard-HBS, NBER)

Ramana Nanda (Harvard-HBS, NBER)

Richard Townsend (UCSD, NBER)

Venture capital is a key driver of high-quality innovation in the United States. This paper assesses the cyclicality of venture capital and its impact on innovation, in the form of patents, and finds that venture-backed innovation is more cyclical than the broader economy – both in volume and in quality.

Over four decades (1976-2017), venture-backed patents are of higher quality than the average contemporary patents. Venture funded innovation is overwhelmingly among the top-cited patents and is disproportionately likely to be more original, more general and more closely related to fundamental science. However, patents with research and development conducted by venture-backed firms during recessions are less highly cited, less original, less general and less closely related to fundamental science on average than contemporary non-venture patents filed. This impact is found across sectors but concentrated in early-stage investments. This decrease in innovation can be attributable to lower risk appetite exhibited by VCs and a desire to conserve capital (by both GPs and LPs).

Josh Lerner (Harvard-HBS, NBER)

Jason Mao (State Street Global Exchange)

Antoinette Schoar (MIT, NBER)

Nan Zhang (State Street Global Exchange)

As alternative investment vehicles (AVs) have become more prevalent in private equity investment, these authors examine what AVs mean for LP performance. The average AV performance matches the overall PE market but underperforms the main fund sponsored by the same GP. However, results vary widely and success depends primarily on access, reflecting a differentiated “top tier” among both GPs and LPs.

Top LPs (by past performance) invest in the top-performing AVs which often beat the main fund; vice versa for lower performing LPs. Among investors with access to top-tier GPs, top-tier LPs are almost 3x as likely to have access to AVs than lower-tier LPs – suggesting that GPs share the best opportunities with preferred LPs first. The outperformance of top LPs holds after even accounting for access to AVs within the same partnership or prior investment relationships. Access remains the most critical factor in determining AV investment performance.

Ufuk Akcigit (U. Chicago, NBER)

Sina Ates (Federal Reserve Board)

Josh Lerner (Harvard-HBS, NBER)

Richard Townsend (UCSD, NBER)

Yulia Zhestkova (U. Chicago)

Venture funding from foreign corporate investors has ignited debate over domestic security concerns of technology spillovers, particularly in critical technologies (AI, fintech, robotics, VR, etc.). The authors conclude in favor of foreign VC, citing limited risk of spillovers as compared to the benefits of enhanced productivity from funding new technologies.

This model finds that while foreign corporate VC funding can help US entrepreneurs develop new technology, it also leads to some degree of IP spillover to the foreign investing firm and its domestic government. The authors conclude that restricting foreign venture investments may be prudent for the US in certain cases when the technology is closely related to national security. But in the majority of cases, while technology spillovers are possible and do occur, the benefits of foreign venture funding to the US outweigh the costs.

Andrew Baxter (Harvard-HBS)

Connor Cash (Harvard-HBS)

Josh Lerner (Harvard-HBS, NBER)

Ratnika Prasad (Harvard-HBS)

Environmental conservation has met with many challenges to private investment. Few project opportunities exist at scale and those projects that do exist face challenges accessing credit ratings and other fundraising tools that can help bridge the knowledge and skill gap between investors and conservation organizations. The geography of global needs is misaligned with established market protections and trusted financial intermediaries. The authors find that while there is need for action at all levels, a first step of establishing national programs would encourage both sufficient scale for large investors and intermediaries, as well as growth of sophisticated NGOs.

An entrenched problem is the contradicting incentives between conservation objectives and return maximization, which presents a difficult tradeoff for those with fiduciary obligations. There are no easy solutions and creative thinking is necessary. The authors discuss, for example, how timber project managers might consider diversifying to alternative revenue streams such as water management and carbon.

Benjamin Hammer (Lancaster U. Leipzig)

Silke Pettkus (HHL Leipzig)

Norbert Wünsche (Concordia U-Molson)

Diversity is notably scarce in private equity partnership teams, as illustrated by Josh Lerner et al. (2019), but the question remains: does it help or hinder team cohesion and performance? These authors develop a framework for a team diversity index to empirically test the “bright side” and “dark side” of diversity. Their findings support their hypothesis that “socio-demographic” diversity (gender, age, ethnicity/nationality) among a lead partner team contributes positively to buyout performance. On the other hand, “occupational” diversity (voluntary characteristics  such as professional experience, education, university affiliation) may detract from performance due to communication issues and reduced execution speed. However, the negative effect impact of occupational diversity is reversed in cases of complex investments and during times of uncertainty.

The theory is that diversity in endowed characteristics provides the benefit of multiple perspectives; on the other hand, commonalities in voluntary/chosen attributes may provide the benefit of shared cognitive bases and values.

Two themes on investing strategy that we see across several of these papers are the importance of access and discipline. Cultivating relationships with tomorrow’s top-tier managers will ensure access to outperforming AVs. Committing capital consistently over time is critical for optimizing performance across cycles and enabling startups to unlock the highest quality innovation. We welcome a conversation about how we apply these and other lessons from academia to our approach to private equity.