Tim Jenkinson

New Evidence of the Impact of Dividend Taxation and on the Identity of the Marginal Investor

This Paper examines the impact of a major change in dividend taxation introduced in the UK in July 1997. The reform was structured in such a way that the immediate impact fell almost entirely on the largest investor class in the UK, namely pension funds. We analyse the behaviour of share prices around the ex-dividend day both before and after the reform to test clientele effects and the impact of taxation on the valuation of companies. We find strong clientele effects in the UK, which are consistent with the distortions introduced by the tax system (before the reform dividend income was tax-advantaged in the UK). We also find significant changes in the valuation of dividend income after the reform, in particular for high-yielding companies. These results provide strong support for the hypothesis that taxation affects the valuation of companies, and that pension funds were the effective marginal investors for high-yielding companies.

The Role of Hostile Stakes in German Corporate Governance

This paper uses clinical evidence to show how the German system of corporate control and governance is both more active and more hostile than has previously been suggested. It provides a complete breakdown of ownership and takeover defence patterns in German listed companies and finds highly fragmented (but not dispersed) ownership in non-majority controlled firms. We document how the accumulation of hostile stakes can be used to gain control of target companies given these ownership patterns. The paper also suggests an important role for banks in helping predators accumulate, and avoid the disclosure of, large stakes.

Does One Size Fit All? The Consequences of Switching Markets with Different Regulatory Standards

As the regulation of public companies has progressively tightened in recent years, many companies have chosen to switch to stock exchanges with lower regulatory requirements. We analyse the consequences of switching for smaller quoted companies, using the unusual regulatory environment in London, which has two markets with different regulatory regimes but the same trading technology. Firms that switch to lighter regulation experience negative announcement returns of approximately 4%. However these initial price reactions are reversed after the actual switch. We also find an intriguing longer-term upward drift in stock returns, which we relate to improved operating performance. JEL classification: G14, G30

Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds

The conventional wisdom for investors in private equity funds is to invest in partnerships that have performed well in the past. This is based on the belief that performance in private equity persists across funds of the same partnership. We present new evidence on the persistence of U.S. private equity (buyout and venture capital) funds using a research-quality dataset from Burgiss, sourced from over 200 institutional investors. Relying on detailed cash-flow data for funds, we study the persistence of buyout and venture capital fund performance of the same general partners across different funds. We pay particular attention to persistence pre- and post-2000. Previous research, studying largely pre-2000 data, has found strong persistence for both buyout and venture capital firms. We confirm the previous findings on persistence in pre-2000 funds. There is persistence for buyout funds and, particularly, for venture funds. Post-2000, we find little evidence of persistence for buyout funds, except at the lower end of the performance distribution. When funds are sorted by the quartile of performance of their previous funds, performance of the current fund is statistically indistinguishable regardless of quartile. Performance for partnerships in all previous fund quartiles exceeds those of public markets as measured by the S&P 500. Regression results confirm the absence of persistence post-2000 except for funds in the lower end of the performance distribution. Post-2000, we find that performance in venture capital funds remains as persistent as pre-2000. Partnerships whose previous venture capital funds are below the median for their vintage year subsequently tend to be below median and have returns below those of the public markets (S&P 500). Partnerships in the top two quartiles tend to stay above the median and their returns exceed those of the public markets.

How Persistent is Private Equity Performance? Evidence from Deal-Level Data

The persistence of returns is a critical issue for investors in their choice of private equity managers. In this paper we analyse buyout performance persistence in new ways, using a unique database containing cash-flow data on 13,523 portfolio company investments by 865 buyout funds. We focus on unique realized deals and find that persistence of fund managers has substantially declined as the private equity sector has matured and become more competitive. Private equity has, therefore, largely conformed to the pattern found in most other asset classes in which past performance is a poor predictor of the future.

Regulation and the Cost of Capital

The cost of capital is one of the most important factors that regulators, and companies, have to estimate. The appropriate cost of capital for regulated industries has been debated extensively in many countries, in particular the US with its general (although not exclusive) reliance on rate of return regulation. However, in recent years, the cost of capital debate has been particularly active in the UK, where regulation tends to be on the basis of price-caps (or, in some cases, revenue caps). This paper reviews the way that regulators in the UK (including the Competition Commission) have estimated the cost of capital, and discusses some important issues that remain unresolved.

Who Benefits from the Leverage in LBOs

Tax savings associated with increased levels of debt are often thought to be an important source of returns for private equity funds conducting leveraged buyouts (LBOs). However, as leverage is available to all bidders, the vendors may appropriate any benefits in the form of the takeover premium. For the 100 largest U.S. public-to-private LBOs since 2003, we estimate the size of the additional tax benefits available to private equity purchasers. We find a strong cross-sectional relationship between tax savings and the size of takeover premia; and on average the latter are around twice the size of the former. Consequently, the tax savings from increasing financial leverage essentially accrue to the previous shareholders rather than the private equity fund that conducts the LBO. It is, therefore, unlikely that (ex ante predictable) tax savings are an important source of returns for private equity funds. Furthermore, policy proposals that aim to restrict leverage or the tax-deductibility of debt are likely to have their impact mainly on existing owners of companies.

Are Too Many Private Equity Funds Top Quartile

Assessing investment performance for private equity is inherently difficult due in large part to the nature of illiquid assets. Compounding this problem, investors and researchers alike are bedeviled by the existing lack of comprehensive, high-quality data. The current state of affairs obscures answers to basic practical questions, leads to lack of standardization, and creates confusion. This paper examines measurements of “top quartile” performance, a status widely prized in the industry, especially in light of past research showing return persistence by funds raised by the same general partner. Using three popular data sources and applying metrics typically adopted in the industry, the authors demonstrate that even modest variations in methods can result in half of all funds being able to claim “top quartile” results. Sources of variation include methods of categorizing funds, definitions of vintage year, choice of the data source, specification of performance metrics, and treatment of geography and currencies.

What Do Different Commercial Data Sets Tell Us About Private Equity Performance

This paper examines private equity (both buyout and venture funds) performance around the globe using four data sets from leading commercial sources. For North American funds, our results echo recent research findings: buyout funds have outperformed public equities over long periods of time; in contrast, venture funds saw performance fall after spectacular results for vintages in the 1990s. For funds outside North America, buyout funds show performance similar to those in North America while venture fund performance is weaker than in North America. Venture samples outside North America are, however, relatively small and strong conclusions await further research. The similarity of performance estimates across the data sets strengthens confidence in conclusions about the results of private equity investing.

Quid Pro Quo? What Factors Influence IPO Allocations to Investors?

Using detailed information from a large sample of investment banks we test the determinants of IPO allocations. This research draws on data gathered by the UK Financial Conduct Authority, and covers 220 IPOs managed from the UK raising around