Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

The herd mentality in private equity

18.09.2007
Private equity as a form of financing for businesses is in the spotlight. The magnitude of this type of investing is progressing in waves.

It seems as if the private equity market is taking a breath for a moment after a period of high flying. In his dissertation Private equity acquisitions Ward van den Berg researches takeovers of private equity funds and looks at what strategies the private equity firms used to put out their investments.

Investors watch each other closely, and one corporate takeover often prompts another. Van den Berg will defend his dissertation on Thursday 20 September 2007.

With regard to the recent fierce debate, private equity (investing in companies that are not listed on the stock market) seems like a new economic phenomenon. Yet this important source of business financing has been around since the beginning of the 1980s. Private equity is an important source of financing for start up businesses, medium sized private businesses that are undergoing restructuring, and businesses that want to terminate their stock market listing.

Wave patterns can be discerned in the magnitude and progression of this type of investing; periods of expansion alternate with periods of retrenching. In the United States, for example, in the 1980s cumbersome conglomerates of companies were bought up with private equity, with the intention of structuring these businesses more efficiently. But the tough competition for a limited number of deals drove up the price of takeovers and returns on investments diminished.

Because of the high expectations, the available assets turned out to exceed the playing field and sources of financing scaled back their supply. At the beginning of the 1990s the private equity market in the US dried up.

These sorts of wave patterns seem to occur time and again, and both on the leveraged buyout market (takeovers of full grown companies with stable cash flows) and on the venture capital market (investments in new young companies). One acquisition seems to invite another. What strategies do private equity firms use in putting out their investments? In private equity not all the players have access to the same information. Private equity is also characterised by a high degree of uncertainty about the value of the investment and limited liquidity; you are bound to your investment for a long time. These characteristics prompt investors to look at each other’s investment behaviour in order to limit the risks. It can also lead to herd mentality however, when financiers invest in businesses unscrupulously.

Van den Berg uses three models to describe how acquisitions seem to prompt each other. The announcement of a takeover and the initial bid awake the interest of a second party, and this already can drive the price up to a point that stops this second party from taking part in a bidding war. An investment in a buyout can also unveil information that other financiers use in their own investment decisions. This attentiveness to the behaviour of others can lead to a wave of private equity investments. Finally in the consolidation of a branch of business the value of every successive takeover candidate increases, to the extent that more companies have been bought up. This too leads to a new wave of investments.

Yvette Nelen | alfa
Further information:
http://www.eur.nl/english

More articles from Business and Finance:

nachricht Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik

nachricht RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: New interactive machine learning tool makes car designs more aerodynamic

Scientists develop first tool to use machine learning methods to compute flow around interactively designable 3D objects. Tool will be presented at this year’s prestigious SIGGRAPH conference.

When engineers or designers want to test the aerodynamic properties of the newly designed shape of a car, airplane, or other object, they would normally model...

Im Focus: Robots as 'pump attendants': TU Graz develops robot-controlled rapid charging system for e-vehicles

Researchers from TU Graz and their industry partners have unveiled a world first: the prototype of a robot-controlled, high-speed combined charging system (CCS) for electric vehicles that enables series charging of cars in various parking positions.

Global demand for electric vehicles is forecast to rise sharply: by 2025, the number of new vehicle registrations is expected to reach 25 million per year....

Im Focus: The “TRiC” to folding actin

Proteins must be folded correctly to fulfill their molecular functions in cells. Molecular assistants called chaperones help proteins exploit their inbuilt folding potential and reach the correct three-dimensional structure. Researchers at the Max Planck Institute of Biochemistry (MPIB) have demonstrated that actin, the most abundant protein in higher developed cells, does not have the inbuilt potential to fold and instead requires special assistance to fold into its active state. The chaperone TRiC uses a previously undescribed mechanism to perform actin folding. The study was recently published in the journal Cell.

Actin is the most abundant protein in highly developed cells and has diverse functions in processes like cell stabilization, cell division and muscle...

Im Focus: Lining up surprising behaviors of superconductor with one of the world's strongest magnets

Scientists have discovered that the electrical resistance of a copper-oxide compound depends on the magnetic field in a very unusual way -- a finding that could help direct the search for materials that can perfectly conduct electricity at room temperatur

What happens when really powerful magnets--capable of producing magnetic fields nearly two million times stronger than Earth's--are applied to materials that...

Im Focus: World record: Fastest 3-D tomographic images at BESSY II

The quality of materials often depends on the manufacturing process. In casting and welding, for example, the rate at which melts solidify and the resulting microstructure of the alloy is important. With metallic foams as well, it depends on exactly how the foaming process takes place. To understand these processes fully requires fast sensing capability. The fastest 3D tomographic images to date have now been achieved at the BESSY II X-ray source operated by the Helmholtz-Zentrum Berlin.

Dr. Francisco Garcia-Moreno and his team have designed a turntable that rotates ultra-stably about its axis at a constant rotational speed. This really depends...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

Within reach of the Universe

08.08.2018 | Event News

A journey through the history of microscopy – new exhibition opens at the MDC

27.07.2018 | Event News

2018 Work Research Conference

25.07.2018 | Event News

 
Latest News

'Building up' stretchable electronics to be as multipurpose as your smartphone

14.08.2018 | Information Technology

During HIV infection, antibody can block B cells from fighting pathogens

14.08.2018 | Life Sciences

First study on physical properties of giant cancer cells may inform new treatments

14.08.2018 | Life Sciences

VideoLinks
Science & Research
Overview of more VideoLinks >>>