Memorandum from Professor Mike Wright
and Andrew Burrows, Centre for Management Buy-out Research, Nottingham
University Business School
EXECUTIVE SUMMARY
— This memorandum responds to the call
by the Treasury Select Committee for proposals for a respected
capability for providing comprehensive, industry-wide data on
the private equity industry.
— We believe that a respected capability
for Providing Comprehensive, Industry-wide Data on the Private
Equity Industry needs to have both the specialist expertise in
constructing, maintaining and developing large scale databases,
as well as having the validation of analyses by the peer-reviewed
process.
— We propose that an appropriate capability
can be achieved by developing the work of the Centre for Management
Buy-out Research which has over 20 years experience in monitoring
the private equity and buy-out industry.
INTRODUCTION
1. This memorandum responds to the call
by the Treasury Select Committee for proposals for a respected
capability for providing comprehensive, industry-wide data on
the private equity industry.
BACKGROUND TO
THE CENTRE
FOR MANAGEMENT
BUY-OUT
RESEARCH (CMBOR)
2. CMBOR was founded by what are now Barclays
Private Equity and Deloitte in 1986 at Nottingham University,
in what is now Nottingham University Business School. Barclays
Private Equity and Deloitte continue to provide financial support
that helps to fund the research staff. The relationship is at
arms' length. CMBOR was founded specifically to monitor buy-outs
in a comprehensive and objective way; from the beginning this
has covered both private equity backed and non-private equity
backed buy-outs. CMBOR is an associate member of the BVCA but
is otherwise independent of the BVCA. CMBOR has now developed
a wide-ranging and detailed database of over 25,000 buy-outs/buy-ins,
which provides the only complete set of data on these transactions
in the UK and Continental Europe.
3. The founders of CMBOR provide support
to build the buy-out database. Their primary interest is in the
quarterly trends statistics for which they seek to obtain press/media
coverage. CMBOR is regularly referred to in the press as the authoritative
source of buy-out data. The number of deals and information fields
added to this database each year far exceeds those of other [commercial]
databases.
4. CMBOR has published and disseminated
papers to a wide audience over several years that include the
examination of profit growth and other performance measures such
as employment[6]
and productivity.[7]
These could easily be extended to include other measures. CMBOR
would be open to collecting additional detailed data on private
equity investment activity as appropriate.
REQUIREMENTS FOR
A RESPECTED
CAPABILITY
5. We believe that a respected capability
for Providing Comprehensive, Industry-wide Data on the Private
Equity Industry needs to have both the specialist understanding
of the sector combined with expertise in constructing, maintaining
and developing large scale databases on the sector, as well as
the validation of analyses by the peer-reviewed process. The latter
is especially important to achieve objective, rigorous analyses
and if it is difficult to avoid some form of funding of the monitoring
body by the industry (see below). CMBOR combines these two elements.
6. The rigour of CMBOR is emphasised by
Mike Wright, as founder director, being a full time academic (Professor
of Financial Studies), wholly funded by the university and who
does not receive any remuneration from the sponsors. Wright organised
the first conference on private equity and MBOs in 1981, and his
PhD in 1985 was on this topic. His initial work on buy-outs was
funded by the ESRC and resulted in a number of peer-reviewed papers.
On the basis of his academic research in this area, he received
an Honorary Doctorate from the University of Ghent and is a visiting
professor at Erasmus University and INSEAD. Wright is an editor
of the Journal of Management Studies, probably the leading European-based
peer-reviewed management journal.[8]
7. The original premise for establishing
CMBOR at a university was that, having built the database, it
would be used to develop rigorous academic studies, typically
in collaboration with other full-time university faculty at Nottingham
or elsewhere. This generally involves taking the basic data from
the CMBOR dataset regarding deal names and combining it with data
from other sources, eg the UK government's establishment level
survey or the FAME database, etc; this work is generally done
by collaborating full-time academics who have no connection with
the industry. Currently, CMBOR is collaborating with 20 academics
on private equity and buy-out related projects.
8. The academic papers have contributed
to the wider understanding of buy-outs and private equity over
the period since CMBOR was founded. Most recently, findings on
the impact of buy-outs and buy-ins on employment, wages and industrial
relations have had extensive coverage and it is interesting that
the findings have been used by both the industry and the union
side to support their cases.
9. To date, over 40 peer-reviewed articles
have been published by Wright and colleagues on this area, and
within the last three years 12 have been published, accepted for
publication or are in working paper format. It is most important
to stress that the results of this academic work have been published
extensively in rigorously peer-reviewed international-level academic
journals. Referees and editors have never questioned the nature
of the CMBOR database; on the contrary it is generally seen as
a valuable source because it is comprehensive and located at a
university.
10. Although CMBOR informs its founders
about what academic activities are being undertaken, the results
of which may occasionally be used in press releases, this research
agenda is decided solely by the academics. There has never been
any attempt to restrict CMBOR's ability to research whatever it
wishes from an academic perspective.
POLICY USE
OF CMBOR DATA
AND ANALYSES
11. The rigour and objective nature of CMBOR's
analysis is reflected in reports and advice provided by CMBOR
since its foundation to bodies such as: the National Audit Office
in the UK [returns on privatised firms and a report on auditing
privatisations by buy-outs], ILO, EBRD, EU, OECD, etc. Most recently,
CMBOR wrote a detailed report for the OECD on private equity and
buy-outs.[9]
CMBOR also during 2007 made presentations on private equity to
the Bank of England and has held discussions with Treasury officials
regarding private equity.
12. CMBOR's data and analysis have been
used in recent reports regarding private equity. CMBOR's data
was extensively quoted in the 2006 FSA report on private equity.
The FSA obtained data from CMBOR on the private equity market
that was used in the TSC Vol 1 report on private equity. The quantitative
evidence on employment and wages effects of private equity in
the Work Foundation report on private equity, which was referred
to in the TSC Vol. 1 report, relied very extensively on the studies
by Wright and colleagues and specific analyses were provided for
the author without charge.
COMPREHENSIVE SCOPE
OF MONITORING
COVERAGE
13. The Walker Guidelines focused on the
largest private equity transactions and therefore do not enable
comprehensive, industry-wide monitoring. Although extending coverage
to a broader segment of the market raises potential issues about
the burden of reporting, it would make for more reliable, meaningful
and balanced monitoring of the private equity industry as a whole.
In any case, the annual number of large deals completed is quite
volatile, with there being few if any very large deals in some
years. Extending the collection of data to the mid-market is important
in enabling a more balanced view to be obtained, especially in
the light of existing evidence of considerable heterogeneity in
private equity. For example, there are differences in the employment
effects of buy-outs and buy-ins[10]
and differences in the extent of post-buyout restructurings and
exit timescales according to size and vendor (source) of deal.[11]
14. If deals with enterprise value of £100
million and above were included, the total number of deals reviewed
in 2006 would be 58 (9% of all deals) valued at £20.6 billion
(78% of total market value). Further extending the approach to
cover the £50-100 million range would bring in a further
36 deals in 2006. Furthermore if the threshold were lowered to
£10 million the total for 2006 would be increased to 196.
Therefore, CMBOR believes there is scope to widen monitoring to
include mid market buy-outs from, say, a £50 million deal
value upwards. CMBOR's database already provides the basis for
tracking these deals.
15. In comparison with CMBOR, academics
do not tend to engage in the collection of primary data on a continuing
basis. Rather, they make use either of commercially developed
databases [eg Zephyr, Thomson One Banker and Corpfin in the UK
and Venture Economics in the U.S.]. An alternative is that some
academics make use of government data sources [such as the Bureau
of Census data in the U.S.] but as this is typically collected
for other purposes, the information relating to private equity
can be quite limited. A further option for buy-outs of listed
corporations is to make use of publicly available data, but again
this covers only a limited subset of the market. These different
sources of data may then be combined with other information to
create larger datasets.
RECOMMENDATIONS
16. The notion of a purely independent body
to monitor private equity raises major questions over who will
fund it. If such a body receives funding from the industry, it
too will be open to criticism that it is not independent. We suggest
that a way forward is for an arms' length relationship with the
industry that can be achieved by locating a monitoring capability
at a university, as is the case with CMBOR.
17. The benefit of using CMBOR is that the
data are comprehensive and already provide a basis for monitoring.
The CMBOR database comprises 25 years of data covering private
equity and buy-outs deals across the UK and Europe. CMBOR goes
to great lengths to ensure that it obtains as wide and complete
a coverage of private equity deals as possible. Unlike commercially
available sources, we also include information on confidential
deals, engage in more effort to follow deals post-buy-out, and
have a network of academic collaborators who are fully independent
from the industry who can undertake rigorous analyses. This work
also enables CMBOR to compare private equity with non-private
equity backed buy-outs (if the data just looked at private equity
backed buy-outs this would be a major shortcoming) as well as
to compare private equity and buy-outs with firms in general.
18. Given that the CMBOR database is already
extant it is not clear what would be gained by beginning a new
dataset ab initio that would be less complete and that would take
several years to build up before any trends could be analysed.
19. We suggest that it would be appropriate
to explore options whereby the CMBOR database, as the widely acknowledged
comprehensive and authoritative holder of deal information, could
be used as the source for researchers and other interested parties
wishing to conduct analyses of the market. To some extent this
occurs already through our wide range of collaborative arrangements
but there may be scope for this to be extended.
December 2007
6 Amess, K and Wright, M, 2007. The wage and employment
effects of leveraged buyouts in the U.K. International Journal
of Economics and Business, forthcoming. Back
7
Harris, R, Siegel, D S and Wright, M, 2005. Assessing the impact
of management buyouts on economic efficiency: plant-level evidence
from the United Kingdom. The Review of Economics and Statistics,
87, 148-153. Back
8
According to the 2006 ISI rankings, JMS was ranked in 11th position
out of 64, the highest ranked European-based journal. Back
9
This report is available from the OECD website or the CMBOR website
[www.cmbor.com]. Back
10
Amess and Wright, ibid. Back
11
For a review see: Wright, M, Burrows, A, Ball, R, Scholes, L,
Meuleman, M and Amess, K, 2007. The implications of Alternative
Investment Vehicles for Corporate Governance: A Survey of Empirical
Research, Report prepared for the Steering Group on Corporate
Governance. Paris: OECD. Back
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