PE valuation creation Flashcards
(8 cards)
Jensen (1989) Q1: Why does Jensen argue that public firms are inefficient in capital use?
A1: Public firms often generate excess free cash flow and suffer from weak governance due to dispersed ownership. Without strong oversight, managers may misuse funds on value-destroying investments. PE, with concentrated ownership and debt pressure, enforces discipline and efficiency.
Jensen (1989) Q2: How does private equity improve governance according to Jensen?
A2: PE imposes tighter control through leverage and ownership concentration. Debt obligations reduce slack, while active owners monitor performance closely. This structure aligns management incentives with investor interests, improving operational performance and value creation.
Kaiser & Westarp (2010) Q1: Is PE/VC value creation just about financial engineering?
A1: No. While leverage plays a role, the study shows systematic value creation through operational improvements, strategic input, and active governance across all investment stages—from sourcing deals to exits.
Kaiser & Westarp (2010) Q2: How do PE and VC firms add value beyond capital?
A2: They contribute expertise in scaling, restructuring, and industry strategy. By installing better governance, supporting growth initiatives, and preparing firms for exit, they enhance enterprise value in a structured and replicable way.
Gordon (2012) Q1: What factors contributed to the rise of private equity historically?
A1: The growth of PE is tied to favorable tax policies, deregulation, increased institutional capital, and evolving investor needs. These macroeconomic and policy shifts created the conditions for PE to flourish as a mainstream asset class.
Gordon (2012) Q2: Why is it important to understand PE in its historical context?
A2: Understanding the historical drivers helps explain PE’s current structure, regulatory challenges, and economic influence. It reveals that PE’s evolution was not accidental but shaped by deliberate financial and political developments.
Kahle & Stulz (2017) Q1: Why are fewer firms going public in the U.S.?
A1: Increased regulatory burdens, high listing costs, and the availability of ample private capital have made public markets less attractive. Many firms prefer to stay private where they can operate with more flexibility and fewer disclosures.
Kahle & Stulz (2017) Q2: What does the decline in public corporations indicate about capital markets?
A2: It signals a structural shift. Public markets are no longer the default route for growth-stage firms. Instead, PE and private financing provide competitive alternatives, reshaping how firms raise capital and scale operations.
