Ayako Yasuda
Professor of Finance
THE GRADUATE SCHOOL
OF MANAGEMENT,
UNIVERSITY OF CALIFORNIA,
DAVIS
asyasuda@ucdavis.edu
Professor of Finance
THE GRADUATE SCHOOL
OF MANAGEMENT,
UNIVERSITY OF CALIFORNIA,
DAVIS
asyasuda@ucdavis.edu
With Keer Yang, University of California, Davis - Graduate School of Management; Ayako Yasuda, University of California, Davis - Graduate School of Management;
ABSTRACT: We develop a scalable method that classifies investment managers’ statements on sustainability into three goals: financial value, categorical morality, and impact. Using this method, we document that most funds labeled “sustainable” do not aim to generate impact, and instead aim to enhance financial value and/or satisfy ethical purity criteria. In the prospectuses of U.S. mutual funds identified as sustainable by Morningstar, 54% incorporate ESG to enhance financial performance, 39% practice categorical morality via exclusion, and 33% seek to generate impact. Financial and impact (moral) goals are negatively (positively) correlated. Financial and moral hybrid funds is the most common type, encompassing 36% of AUM and 26% of fund count of sustainable funds, compared to 9% and 16% for pure impact funds. Our classification captures real differences in management practices. Financial funds hold stocks with higher MSCI ESG ratings relative to industry averages. Moral funds underweight companies in controversial industries and tilt towards industries with high average ESG ratings. Impact funds hold stocks with lower ratings relative to industry averages – or more room for improvement – in both environmental and social subcategories; the exception is that they hold stocks with higher ESG ratings in pursuing environmental opportunities (e.g., clean tech). Impact funds are more likely to support social and environmental shareholder proposals and improve the ESG performance of portfolio companies during the investment holding period relative to other sustainable funds. We propose mandatory fund labels that clearly separate “doing well and being good (via ethical exclusion)” (financial and moral hybrid funds) from “doing good” (impact funds).
With Vikas Agarwal, Georgia State University; Brad Barber, UC Davis; Si Cheng, CUHK Business School; Allaudeen Hameed, NUS Business School; Harshini Shanker, London Business School
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ABSTRACT: We show that mutual funds report their junior stakes in startups at 43% higher valuation than model fair values that consider multi-tier capital structures of startups. The latest-issued and most senior security is worth 48% per share than junior securities held by mutual funds, implying that mutual funds mark junior securities close to par with the senior securities. Our findings are robust to model assumptions. Identical valuations reported for dual holdings of senior and junior securities imply 37% discrepancy in implied values of the firm. Overvaluation is lower for fund families with longer experience in private startup investments, and higher for junior securities purchased in secondary transactions. Overvaluation declines after down rounds (new financing rounds with purchase prices lower than previous rounds) and near IPOs. The results are consistent with mutual funds neglecting the probability of negative outcomes in which junior securities are paid less than senior securities and overweighting successful exits where all securities convert to common equity and are valued equally.
With Vikas Agarwal, Georgia State University; Brad Barber, UC Davis; Si Cheng, CUHK Business School; and Allaudeen Hameed, NUS Business School
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ABSTRACT: Mutual fund families set and report values of their private startup holdings, which affect the fund net asset value (NAV) at which investors buy/sell fund shares. We test three hypotheses related to the valuation practice: (i) information cost/access, (ii) litigation risk, and (iii) strategic NAV management. Consistent with (i), families with larger PE holdings and/or stronger information access update valuations more frequently in the absence of public information releases, their updates co-move less with other families, and their fund returns jump less at follow-on financings. We find no support for hypotheses (ii) or (iii). We also find that high-PE-exposure funds are subject to greater financial fragility.
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ABSTRACT: Impact investing is a class of investments that are designed to meet the non-pecuniary preferences of investors (or beneficiaries) and aim to generate a positive externality actively and causally through their ownership and/or governance of the companies they invest in. Impact investing emerged as a new branch of responsible, sustainable or ESG (environmental, social, and governance) investment universe in the last few decades. In this article, we provide a definition of impact investing, review the extant literature, and discuss suggestions for future research.
with Morten Sorensen, Tuck School of Business
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ABSTRACT: We survey the academic literature about the impact of private equity investments in the broader economy. Private equity fund managers respond to high-powered incentives and seek to maximize shareholder values via a variety of channels. The literature identifies two broad approaches to value creation taken by private equity funds with sharply divergent outcomes for stakeholders and the aggregate economy. The first approach, associated with public-to-private deals, exploits leverage and interest tax shields, cost reduction, and operating margin improvement. The second approach, associated with private-to-private deals, targets growth-oriented and capital-constrained companies and adds value by relaxing financing constraint, imparting operational and managerial expertise, increasing investment, and inducing top-line revenue growth. Innovation tends to increase with the latter approach (private-to-private deals) while it either declines relatively or becomes more narrowly focused with the former approach (public-to-private deals). For employees, post-buyout high-skilled workers tend to benefit from increased IT investments and upskilling in the jobs, whereas low-skilled workers tend to be hurt from automation and job cuts. For consumers, private-to-private deals imply greater variety and broader geographic availability of products, whereas public-to-private deals imply higher prices and reduced availability. In regulated or subsidized industries, distortion in incentives given by the regulatory framework tends to get magnified when combined with high-powered incentives of private equity. The literature provides evidence of this in healthcare, for-profit education, insurance, and the fracking industry. Collectively, the emerging evidence suggests that welfare outcomes for the broader environment and society depend sharply on the regulatory and competitive structures within which the private equity portfolio companies operate. Thus, regulators need to consider the impact of the high-powered incentives of private equity when assessing the market impact of a given regulatory policy or decision. Finally, impact funds are posited as a mechanism for explicitly aligning the shareholder preferences with the broader public interest. Impact fund investors derive utility from holding impact funds that generate positive impact, and thus are rationally willing to invest in them even though their expected financial return alone may be lower than that from investing in non-impact private equity funds. The result is consistent with the theory of sustainable investing in equilibrium with explicitly pro-social investors. Suggestions for future research are discussed.
With Massimo Massa, INSEAD, and Lei Zhang, NTU
ABSTRACT: We examine the effect of the bond capital supply uncertainty of institutional investors (e.g., mutual bond funds and insurance companies) on the leverage of the firm using a novel dataset. Our main finding is that the supply uncertainty of the firm’s bond investor base — measured as (i) the average portfolio turnover or (ii) the average flow volatility of investors holding the firm’s bonds, or (iii) the prevalence of mutual funds among the firm’s bondholders as opposed to insurance companies — has a negative and significant effect on the leverage of the firm. The supply uncertainty of the firm’s bond investor base also has a negative and significant effect on the firm’s probability of issuing bonds, and a positive and significant effect on the firm’s probability of issuing equity and borrowing from banks. We take a multi-pronged approach to address potential endogeneity issues, including use of geography-based instruments and firm fixed effects, subsample analyses, and a placebo test. Our results highlight the fragility of access to the bond market for companies that depend on mutual funds with high turnover / flow volatility as primary bond investors.
with Lily H. Fang, INSEAD
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ABSTRACT: Using 1994–2009 data, we find that All-American (AA) analysts’ buy and sell portfolio alphas significantly exceed those of non-AAs by up to 0.6% per month after risk-adjustments for investors with advance access to analyst recommendations. For investors without such access, top-rank AAs still earn significantly higher (by 0.3%) monthly alphas in buy recommendations than others. AAs’ superior performance exists before (as well as after) they are elected, is not explained by market overreactions to stars, and is not significantly eroded after Reg-FD. Election to top-AA ranks predicts future performance in buy recommendations above and beyond other previously observable analyst characteristics. Institutional investors actively evaluate analysts and update the AA roster accordingly. Collectively, these results suggest that skill differences among analysts exist and AA election reflects institutional investors’ ability to evaluate and benefit from elected analysts’ superior skills. Other investors’ opportunity to profit from the stars’ opinions exists, but is limited due to their timing disadvantage.
Study Finds a Real Advantage, but Investors Have to Act Right Away... Cited in the Wall Street Journal, Jan 2015.
If an investment bank has lucrative underwriting relationships, will its analysts necessarily produce lower quality research to the detriment of investors, because of their compromised objectivity? It is a question that academics have debated for over a decade, but one that seemed to take regulators by surprise after the bursting of the dotcom bubble in 2001, and the subsequent wave of corporate accounting scandals... Published in the Financial Times, April 2006.
with K. Harada, T. Hoshi, M. Imai, S. Koibuchi
with Takeo Hoshi, Stanford University
with Andrew Metrick, Yale School of Management
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ABSTRACT: We review the theory and evidence on venture capital (VC) and other private equity: why professional private equity exists, what private equity managers do with their portfolio companies, what returns they earn, who earns more and why, what determines the design of contracts signed between (i) private equity managers and their portfolio companies and (ii) private equity managers and their investors (limited partners), and how/whether these contractual designs affect outcomes. Findings highlight the importance of private ownership, and information asymmetry and illiquidity associated with it, as a key explanatory factor of what makes private equity different from other asset classes.
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ABSTRACT: This paper examines the effects of bank relationships on underwriter choice in the Japanese corporate-bond market following the 1993 deregulation. Bank relationships have significant positive effects on a firm's underwriter choice. Relationship firms receive a small but significant fee discount and, consistent with mitigating effect of bank competition on holdup cost, multiple-relationship firms receive a significantly deeper discount than solo-relationship firms. Bank shareholding alone negatively affects underwriter choice, whereas shareholding together with loans have significantly more positive effects than loans alone. Finally, existing relationships reduce a Japanese firm's switching probability by 32%, in contrast to only 6% for U.S. firms.
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ABSTRACT: This paper studies the effect of bank relationships on underwriter choice in the U.S. corporate-bond underwriting market following the 1989 commercial-bank entry. I find that bank relationships have positive and significant effects on a firm’s underwriter choice, over and above their effects on fees. This result is sharply stronger for junk- bond issuers and first-time issuers. I also find that there is a significant fee discount when there are relationships between firms and commercial banks. Finally, I find that serving as arranger of past loan transactions has the strongest effect on underwriter choice, whereas serving merely as participant has no effect.
With Andrew Metrick, Yale School of Management
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ABSTRACT: An invaluable resource for current and aspiring technology investors, Venture Capital and the Finance of Innovation provides an in-depth understanding of the tools and models needed to succeed in this competitive and highly fluid business environment. Building on a comprehensive introduction to fundamental financial and investment principles, the text guides the reader toward a robust skill set using enterprise valuation and preferred stock valuation models, risk and reward, strategic finance, and other concepts central to any venture capital and growth equity investment.
Winner of the Moskowitz Prize for Socially Responsible Investing
With Brad Barber, UC Davis, Graduate School of Management and Adair Morse, UC Berkeley, Haas School of Business
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ABSTRACT: We show that investors derive nonpecuniary utility from investing in dual-objective Venture Capital (VC) funds, thus sacrificing returns. Impact funds earn 4.7 percentage points (ppts) lower internal rates of return (IRRs) ex-post than traditional VC funds. In random utility/willingness-to-pay (WTP) models investors accept 2.5–3.7 ppts lower IRRs ex ante for impact funds. The positive WTP result is robust to fund access rationing and investor heterogeneity in fund expected returns. Development organizations, foundations, financial institutions, public pensions, Europeans, and United Nations Principles of Responsible Investment signatories have high WTP. Investors with mission objectives and/or facing political pressure exhibit high WTP; those subject to legal restrictions (e.g., Employee Retirement Income Security Act) exhibit low WTP.
Featured in PE Findings by London Business School Institute of Private Equity
With Brad Barber, UC Davis, Graduate School of Management
ABSTRACT: General partners (GPs) in private equity (PE) report the performance of an existing fund while raising capital for a follow-on fund. Interim performance has large effects on fundraising outcomes; the impact is greatest when backed by exits and for low reputation GPs. Faced with these incentives, GPs time their fundraising to coincide with periods of peak performance through two strategies: “exit and fundraise” and “NAV management.” Consistent with the former, performance peaks are greatest for funds with high realization rates. Consistent with the latter, low reputation GPs with low realization rates also experience performance peaks and erosions in performance post fundraising.
with Andrew Metrick, Yale School of Management
and Wonho Wilson Choi, KAIST
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ABSTRACT: This paper analyzes the economics of the private equity fund compensation. We build a novel model to estimate the expected revenue to fund managers as a function of their investor contracts. In particular, we evaluate the present value of the fair-value test (FVT) carried interest scheme, which is one of the most common profit-sharing arrangements observed in practice. We extend the simulation model developed in Metrick and Yasuda (2010a) and compare the relative values of the FVT carry scheme to other benchmark carry schemes. We find that the FVT carry scheme is substantially more valuable to the fund managers than other commonly observed (and more conservative) carry schemes, largely due to the early timing of carry compensation that frequently occurs under the FVT scheme. Interestingly, conditional on having an FVT carry scheme, fund managers’ incremental gains from inflating the reported values of the funds’ un-exited portfolio companies would be negligible.
With Alberto Manconi, Tilburg University, and
Massimo Massa, INSEAD
ABSTRACT: Using novel data on investors’ bond portfolios, we study the contagion of the crisis from securitized bonds to corporate bonds. When securitized bonds became “toxic” in August 2007, mutual funds retained the now illiquid securitized bonds and sold corporate bonds. Funds with negative flows or high liquidity needs liquidated more than others. Yield spreads increased more for corporate bonds whose pre-crisis bondholders were more heavily exposed to securitized bonds, compared to same-issuer bonds held by unexposed investors. The findings suggest that liquidity-constrained investors with exposure to securitized bonds played a role in propagating the crisis from securitized to corporate bonds.
A key culprit behind the precipitous price declines in credit markets during the financial crisis: mutual funds with short investing horizons... Published in CFO Magazine Online, July 2010.
with Lily H. Fang, INSEAD
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ABSTRACT: Using 1983-2002 U.S. data, we examine whether the quality differentials in earnings forecasts between reputable and non-reputable analysts vary as the severity of conflicts of interest varies. We measure personal reputation using the Institutional Investor All-American (AA) awards, and bank reputation using Carter-Manaster ranks. While both personal reputation and bank reputation are associated with higher-quality forecasts overall, their effectiveness against conflicts of interest differs. The severity of conflicts (proxied by the aggregate volume of new equity issues) has a negative and significant effect on the performance of non-AAs at top-tier banks relative to both AAs at top-tier banks and non-AAs at lower-tier banks. In contrast, the severity of conflicts has a positive and significant effect on the performance of AAs at top-tier banks relative to both non-AAs at top-tier banks and AAs at lower-tier banks. These findings suggest that personal reputation is an effective disciplinary device against conflicts of interest, while bank reputation alone is not.
with Andrew Metrick, Yale School of Management
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ABSTRACT: This paper analyzes the economics of the private equity industry using a novel model and dataset. We obtain data from a large investor in private equity funds, with detailed records on 238 funds raised between 1993 and 2006. We build a model to estimate the expected revenue to managers as a function of their investor contracts, and we test how this estimated revenue varies across the characteristics of our sample funds. Among our sample funds, about two-thirds of expected revenue comes from fixed-revenue components that are not sensitive to performance. We find sharp differences between venture capital (VC) and buyout (BO) funds. BO managers build on their prior experience by increasing the size of their funds faster than VC managers do. This leads to significantly higher revenue per partner and per professional in later BO funds. The results suggest that the BO business is more scalable than the VC business, and that past success has a differential impact on the terms of their future funds.
Andrew Metrick of the Yale School of Management and Ayako Yasuda of the University of California, Davis, found that private equity firms made about two-thirds of their money not from their 20 percent share of the profits but from the fees they charged to operate the companies. Published in the New York Times, January 2012.
The buy-out industry is under attack for destroying jobs. Its returns to investors are the real problem... Published in The Economist, January 2012.
Private-Equity Firms Make Far More Charging Investors, Says a Study... Cited in the Wall Street Journal, September 2007.
