Role of Private Equity in US Capital Markets - Sonecon Oct-2008

8/14/2019 Role of Private Equity in US Capital Markets - Sonecon Oct-2008

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The Role of PRivaTe equiTy in u.S. CaPiTal MaRkeTS

T R Pr t e t u.S. C p t M r tsR b rt J. S p r d n m D. P m

oct b r 2008

S O N E C O N


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1The Role of PRivaTe equiTy in u.S. CaPiTal MaRkeTS

T R Pr t e t u.S. C p t M r ts R b rt J. S p r d n m D. P m 1

inTRoDuCTion

Private equity transactions and operations in the United States have grown dramatically over the last genera-tion. The number and value o U.S. private buyout-related deals rose rom 12 transactions in 1970, involv-ing less than $13 million in direct capital raised and invested, to 2,474 deals in 2007 or which buyout rmsdirectly raised and invested approximately $70 billion (net o leverage or borrowing). 2 Including leverage, thevalue o U.S. buyout deals averaged about $100 billion per-year rom 2000 to 2005. 3 However, these sharpincreases in private-equity buyouts, virtually all o them leveraged and some very highly so, have raisedconcerns about the economys vulnerability to a systemic nancial market event i a large rm, or a series orms purchased in a highly-leveraged buyout or a major private equity rm should suddenly ail. These con-cerns have been heightened by the systemic crisis and enormous costs triggered by the large-scale ailureso mortgage-backed securities and their derivatives, including the collapse o Bear Stearns, Lehman Broth-ers, AIG, Fannie Mae, Freddie Mac and Countrywide Financial Corp., and the severe nancial stresses andextraordinary government interventions on behal o other major nancial institutions. This report examinesthe basis or these concerns. Based on the data and analysis, we conclude that the organization o privateequity buyout unds and the nature and dimensions o their investments are undamentally di erent rom theconditions which have produced our current systemic instability, and that the private equity sector does notseem to present a systemic risk or U.S. capital markets or the economy.

Private equity unds play a distinctive role in U.S. nancial markets and the economy by organizing and chan-neling capital and skilled managers to acquire and operate rms based on their analysis o the returns thoserms could generate i new management brings about signi cant changes in those rms operations. Privateequity investors may buy struggling rms; they may purchase solid but unwanted divisions o conglomerates,and they may acquire strong companies with signi cant growth potential. Regardless, their role contrastsclearly with other nancial institutions and investors including hedge unds, mutual unds, pension plansand other asset management companies, insurance companies, banks, and universities and other endowedinstitutions who purchase securities traded on secondary markets. These types o port olio investors seekto orecast the uture value and returns o the companies or indexes in which they might invest, based ontheir current or announced operations. Private equity unds provide investment opportunities that otherwisewould be unavailable to most institutions, as well as high net-worth individuals, to participate directly in theturn-around operations o non-public companies.

As we will see, numerous studies have ound that the investors in private equity unds, on average, earn above-

market returns, because the earnings o the acquired companies, on average, increase more than those ocomparable, publicly-held corporations. These ndings are consistent with other studies showing that privatelyacquired companies which subsequently go public generally outper orm the market, 4 as well as with data show-

1 This report was supported by the Private Equity Council. The analysis and conclusions are solely the authors.2 VentureXpert Thomson Financial. Over these years, venture capital transactions by private equity investors and unds increased

rom 160 deals totaling approximately $103 million in direct capital invested to 5,303 investments with $40.2 billion invested.3 VentureXpert, Thomson Financial and the Private Equity Council.4 Cao, Jerry and Lerner Josh. (2006). The Per ormance o Reverse Leveraged Buyouts, NBER Working Paper, http://www.people.

hbs.edu/jlerner/RLBOPer ormance.pd .


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ing that private equity operations involving large companies generally create net new jobs, 5 which usually area sign o an expanding market and sales. Many actors help to explain this per ormance, rom the operationalimprovements carried out by private equity investors to the e ects that leverage can play in increasing returnson investment. Whatever the causes, the dramatic growth o private equity largely refects the markets rec-ognition o these results. This recognition has been especially acute among public and private pension plans,

and universities, oundations and other endowed entities, which have become the largest investors in privateequity unds, accounting or more than 42 percent o the capital committed to those unds rom 2000 to 2007. 6

Moreover, these institutions contribute an even larger share o the capital raised in large private equity unds.

Despite this rapid expansion o the private equity sector and its use o leverage nancing, our analysis hasound that these developments do not create new systemic risks or the capital markets and economy.

To begin, data indicate that private equity rms and their transactions are much less highly-leveragedthan the leverage seen in numerous markets that either have experienced systemic problems or havebeen subject to severe stresses without creating such problems. In a sample o 63 o the 70 largest trans-actions carried out by eight large private equity rms rom 2002 to 2005, borrowed unds accounted or

70 percent o the value o the assets purchased by the unds partnerships. While several purchases bythese rms in the last two years have been more highly leveraged, these levels are noticeably less thanthe leverage o Bear Stearns or Lehman Brothers holdings o subprime mortgage-backed securities andderivatives, the average leverage o the ve largest U.S. commercial bank holding companies in the late-1990s, the average leverage o the ve largest investment banks, 7 and the nancial leverage or arbitrageactivities by hedge unds. While the role that leverage plays di ers across asset classes and nancialinstitutions, as we will see, the greater the leverage, all else being equal, the greater the risk o a systemiccrisis arising rom cascading losses.

In contrast to the systemic crisis that has recently un olded in the U.S. nancial system rom the ailureso mortgage-backed securities and derivatives, or the interest rate-based securities and derivatives in-

volved in the cascading problems triggered by the ailure o the Long-Term Capital Management hedgeund in 1999 and 2000, where the potential losses were virtually unlimited, the losses that could arise romthe ailures o rms held by private equity unds are limited to those rms direct liabilities and purchaseprices. An estimated 6 percent o private equity purchases result in bankruptcy or nancial restructuring,and those ailures result in investor losses. But as well will see, investors losses in such instances, oreven i a number o private equity held- rms ailed, pose little risk o a systemic e ect.

Systemic crises involve cascading e ects transmitted across nancial institutions, which ultimately producewhat economists call correlated de aults. 8 In a typical instance, a major event or development createslarge losses or a number o highly-leveraged investment banks, hedge unds or other nancial institutions,orcing them to liquidate assets in order to service their debts and restore their capital; and those large

sales in turn drive down the price o those assets and spread the losses to other nancial institutions. Aprivate equity-held company that ailed is very unlikely to be so interconnected nancially as to cause such

5 Shapiro, Robert and Pham, Nam (2007, July). American Jobs and the Impact o Private Equity Transaction. World Growth, www.worldgrowth.org/assets/File/Shapiro-IPstudy.pd .

6 VentureXpert, Thomson Financial.7 Report o the Presidents Working Group on Financial Markets (1999). Hedge Funds, Leverage and the Lessons o Long-term

Capital Management, http://treas.gov/press/releases/reports/hedg und.pd .8 Chan, Nicholas, Getmansky Mila, Haas Shane, and Lo Andrew. (2005, March). Systemic Risk and Hedge Funds, National

Bureau o Economic Research, Working Paper No. 11200.


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ripple e ects. Moreover, the ownership structure and rules o private equity unds strongly mitigate theirtriggering a systemic crisis o this type. The nancial institutions central to this cascading pattern hold onlyabout one-third o investments in private equity unds, while the pension unds, endowments and wealthyindividuals that hold a majority o these investments are less subject to severe selling pressure rom suddenlosses. Furthermore, private equity investors usually cannot exit a und without giving considerable notice,

even when a large loss occurs, which would short-circuit many instances o cascading panic selling.Systemic crises also are commonly related to the collapse o very speculatively-valued assets, as seenmost recently in speculative mortgages and the securities and derivatives based on those mortgages.The investment ocus o private equity unds on potentially undervalued rms should largely preclude asystemic crisis arising rom the collapse o overvalued assets. At a minimum, our dataset does not sug-gest speculative bubbles in the assets purchased by these large private equity unds during the periodexamined here. Private companies do not have standard price-earnings ratios, since there is no publicmarket price or each share; but the most widely used measure o the ratio o value to earnings in private-ly-held rms, the enterprise-value multiple (EVM), averaged a moderate 9.5 or 63 large transactionsundertaken by eight large U.S. private equity rms rom 2002 to 2005. Some observers claim that several

private equity purchases in the last two years have been overpriced but data or 2006-07 are incompleteand cannot provide the basis or a credible analysis.

The limited size and diversi ed holdings o the private equity sector also make it highly unlikely that prob-lems with some private-equity investments could trigger larger, systemic problems in the capital markets.The direct capital at risk in private equity holdings is less than one percent o the value o all U.S. publiccompanies. The total value o all private equity holdings also is equivalent to just 2.6 percent to 4.3 per-cent o corporate stocks and 3.1 percent to 5.3 percent o GDP, and less than one-seventh the value osubprime mortgages in 2006; and the annual leverage used in all private equity deals since 2000 amountsto less than 8 percent o the net annual borrowing or mortgages. The holdings o all private equity undsalso total less than hal the o -balance sheet holdings in derivatives held by the Long-Term Capital Man-

agement hedge und, just be ore its collapse threatened a systemic crisis. Finally, unlike the systemic riskspresented by the dot-com bubble or the serious system problems trigged by subprime mortgage-backedsecurities, the assets o private equity unds are diversi ed across nearly all major industries and sectors.

The actors which brought down Bear Stearns, Lehman Brothers and AIG, and produced a systemic cri-sis in nancial markets, largely are not present in the private equity sector. Bear Stearns crisis and laterthe crises or Lehman Brothers and AIG began with unds they created to trade very highly-leveragedsubprime mortgage-backed securities (MBSs) and their derivatives, with Lehman Brothers also holding ahighly-speculative and highly-leveraged commercial mortgage port olio. As the housing bubble expanded,these unds returns rose and attracted more institutional investors and more unds or leverage, whichboth institutions invested in more MBSs and their derivatives, including collateralized debt obligations

(CDOs) and credit de ault swaps (CDSs). When the housing market began to all and mortgages began toail, investors moved to liquidate their holdings in the various unds and their lenders called in their loans. Inall these cases, the leverage in this area was so great, and the obligations rom CDOs and CDSs so large,that they exceeded the rms capital and made it technically insolvent. The ailure o these unds and theirparent companies also produced large losses or other nancial institutions which were invested in them orhad loaned unds to them. Many o those institutions also had highly-leveraged port olios o MBSs, CDOsand CDSs; and the sudden, sharp decline in the value o their leveraged holdings orced them to writedown huge losses, damaging their balance sheets, reducing their liquidity and producing a credit crunch.


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point, there were 12,187 deals involving capital investments o $167.7 billion by the unds (Figure 1, below).In 2007, private equity investors completed 7,777 transactions involving $110.2 billion in private equity- undcapital. The number o private equity rms also increased rom 92 in 1970 to 3,250 in 2000, and then ell to2,823 by December 2007. The average size o the direct investments increased our- old rom $3.5 million in1970 to $14.2 million in 2007 (2007 dollars). 10

Figure 1. Number o Private Equity Deals and Total Investments, 1970-2007 11

Most o the recent growth in private equity investment has involved buyouts, and those buyouts also haveshi ted in ocus rom purchases o small subsidiaries o large rms to buyouts o entire companies, o ten

privately-held rms.12

As Figure 2, next page, shows, venture-related investments in the 1970s were 4.4 timesgreater than buyout-related investments; since 2000, venture investments have exceeded buyouts by only 17percent. Buyout-related investments in the 1970s totaled $425 million in 353 deals, compared to $1.9 billionin 2,159 venture investments; rom 2000 to 2007, buyouts totaled $299.3 billion in 14,408 deals, compared to$350.7 billion in 38,976 venture deals. 13 Apart rom the $31.1 billion acquisition o RJR Nabisco in 1988, theten largest buyouts on record all occurred in 2005, 2006 or 2007. 14

10 Again, all investment gures cited here are reported by Thomson Financial and represent investments by private equity undsexclusive o outside leverage.11 VentureXpert, Thomson Financial.12 The boundary between venture and buyout unds is not always xed. From 2000 to 2007, 16 percent o investments by venture

capital unds involved buyout-related activities, and 14 percent o investments by buyout unds involved venture capital activities.VentureXpert, Thomson Financial.

13 VentureXpert, Thomson Financial.14 The ten largest private-equity transactions are: TXU ($43.8 billion, 2007), Equity O ce Properties ($38.9 billion, 2006), HCA ($32.7

billion, 2006), RJR Nabisco ($31.1 billion, 1988), Harrahs Entertainment ($27.4 billion, 2006), Clear Channel Communications($25.7 billion, 2006), Kinder Morgan ($21.6 billion, 2006), Freescale Semiconductor ($17.6 billion, 2006), Albertsons ($17.4 billion,2006) and Hertz ($15 billion, 2005); New York Times (2007, February 26). The Top 10 Buyouts.

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Figure 2. Total Investments in Private Venture Capital and Buyouts, 1970-2007

The strong growth o private equity unds refects their acility in identi ying and entering ast-growing marketareas and increasing the pro tability o the rms they acquire. Studies have ound that the investment fowsinto these unds increase sharply when a demand shock occurs in a particular industry portending stronguture growth, most notably the development o personal computers and later the Internet, changes in theFood and Drug Administrations approval process or drugs, and the emergence o a high-yield debt market. 15Private equity investment also generally tracks the business cycle, rising and alling with the overall economy. 16

In this respect, the pattern o growth in private equity investments resembles corporate equities and mutualunds, especially rom 1970 to the mid-1990s. As Figure 3, next page, shows, however, mutual unds havegrown more slowly than public or private equities since the mid-1990s; and investments in corporate equities

and mutual unds have both grown much aster than investments in private equity unds since 2004.

These data also show that private equity investments remain an order o magnitude smaller than these otherareas o investment. In 2007, all new investments in the private equity sector, including both direct capital andleverage, were equivalent to 1.4 percent o mutual und assets and 0.5 percent o equity market assets. Fur-ther, as we will see, the average value o all private equity assets over the period 2000-2005 was equivalentto, at most, 4.6 percent o the average value o all corporate equities over the same years.

15 Ljungqvist, Alexander and Richardson Matthew. (2003, October). The Investment Behavior o Private Equity Fund Managers.Social Sciences Research Network (SSRN), http://ssrn.com/abstract=478061.

16 Axelson, Ul , Stromberg Per, and Weisbach. Michael. (2007, January 4). Why Are Buyouts Levered? The Financial Structure oPrivate Equity Funds. National Bureau o Economic Research, Working Paper No. 12826.

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PRivaTe equiTy funDS anD SySTeMiC RiSk in u.S. CaPiTal MaRkeTS

Private equity buyout unds play two important and distinctive roles in the U.S. economy. In the real, physi-cal economy o actories and o ces, their operations acilitate the productive use o existing assets and re-sources, usually by identi ying companies with untapped potential and reorganizing their operations in ways

that increase their value, including making additional investments.21

As a matter o economic theory andhistory, e orts to turn around or strengthen existing individual companies are an extremely unlikely source osystemic problems in capital markets. 22

On the nancial side o the economy, private buyout unds operate principally as intermediaries that enableinstitutional and individual investors to take stakes in leveraged, merger and acquisition transactions andturnaround operations. 23 The capital or large private equity transactions typically is comprised o 1 to 3 per-cent in contributions rom a unds general partners (although on occasion, it is considerably more), some30 percent rom its outside institutional or individual investors or limited partners, and the remaining undsborrowed rom nancial institutions. 24 This role as intermediary or other institutions in these leveraged invest-ments, along with the growth in the numbers and size o buyouts, are what have raised concerns in some

quarters about systemic risk. As we will see, the evidence suggests that these concerns are unwarranted.

Most o these concerns ocus on the leverage employed in private equity buyouts, as high levels o leveragehave been a actor in other instances o cascading nancial-sector problems, including the current subprimemortgage-related problems. High leverage raises legitimate concerns about systemic risk especially when theleverage is used to speculate on highly-volatile instruments. The ailure o the Long-Term Capital Managementhedge und, which threatened to trigger a systemic nancial crisis, involved investments in highly-unpredictableinterest rate and currency instruments purchased with a leverage ratio o more than 25-to-1. 25 Much more re-cently, the collapse o Bear Stearns, Lehman Brothers and other institutions heavily invested in subprime mort-gage derivatives involved even higher levels o leverage. On February 29, 2008, the gross leverage ratio or BearStearns and Lehman Brothers was nearly 33-to-1. At the end o June 2008, the gross leverage ratio or Freddie

Mac was an extraordinary 68-to-1. With such highly volatile instruments, enormous losses that occur suddenlycan trigger systemic e ects, as the use o high leverage creates losses straining or exceeding an institutionscapital resources, and the instruments purchased with the leverage and those held by other institutions are soldat losses, which may orce those selling them to liquidate other investments as well. These conditions or cascading ailures are not present in the private equity sector. First, the leverage typi-

21 The market in private equity deals involving large companies is also highly competitive: Acquisitions deals targeting companies valuedat $1.5 billion or more attract, on average, more than our bidders, and some 80 percent o large companies sold in private equitytransactions involve auctions with multiple bidders. See Private Equity Council (2007). Public Value: A Primer on Private Equity,

22 This view is rein orced by the shi ting ocus o buyout transactions. In the 1980s and 1990s, one-third or more o all buyoutsinvolved entire publicly-held companies, and up to one-quarter o buyout involved bankrupt rms. This ocus by private equity on

takeovers o entire, publicly-held corporations, especially in transactions resisted by their managements, and ailing companies,raised the rst public concerns about the role o private equity. Since 2000, however, the primary ocus o private-equityinvestments has shi ted: Privately-held rms have made up more than 65 percent o all buyouts, while entire public companieshave accounted or less than one- th and bankrupt enterprises or a mere 3 percent.

23 Metrick, Andrew and Yasuda, Ayako. (2007, September 9). The Economics o Private Equity Funds. Swedish Institute orFinancial Research Con erence on The Economics o the Private Equity Market, http://ssrn.com/abstract=996334.

24 The equity portion o the nancing or 63 buyout deals carried out rom 2002 to 2005 by eight large U.S. private equity rmsranged rom 10 percent to 88 percent o the purchase price, while the debt portion accounted or between 11 percent and 90percent. Data collected by McKinsey and Company or the Private Equity Council.

25 Report o the Presidents Working Group on Financial Markets (1999). Hedge Funds, Leverage and the Lessons o Long-TermCapital Management, http://treas.gov/press/releases/reports/hedg und.pd .


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cally used in private equity transactions, while substantial, is nearly an order o magnitude less than the twoinstances noted above, and considerably less than seen in many other instances that have not producedsystemic crises. The Federal Reserve Board has estimate that the debt-to-equity ratio o companies acquiredby private equity unds in the 1970s and 1980s ranged between 1 and 3. 26 Similarly, a broad study oundthat equity contributions in leveraged buyouts averaged 28.4 percent o the total purchase prices in LBOs

rom 1992 to 2000 and 36.3 percent rom 2001 to 2007.27

As we will see, our sample o 63 large, leveragedbuyouts by eight major private equity unds rom 2002 to 2005 ound an aggregate debt-to-equity ratio o 2.3(the equivalent o approximately 70 percent debt and 30 percent equity), although in individual cases the debtcomponent was as high as 90 percent. 28

For a more systematic view o this issue, we measure the leverage-intensity o private equity buyouts at thetime o acquisition by calculating three separate measures, using our sample o 63 large companies acquiredby eight large U.S. private equity rms during the period 2002-2005. 29 (Table 1, below) This sample includes18 manu acturing and 45 non-manu acturing companies which together were purchased or $136.4 billion,or an average o $2.2 billion per-transaction. These buyouts relied upon $40.8 billion in private equity capitaland $95.6 billion in debt, or a debt-equity ratio o 2.3 at time o acquisitions. The leverage-intensity o these

transactions also can be measured by calculating the debt as the percentage o the purchase price (debt-to-value) and by calculating the equity as the percentage o the purchase price (equity-to-value). At the time othese acquisitions, the debt-to-value ratio o these 63 cases was 70 percent (71.5 percent or manu acturingand 69.6 percent or non-manu acturing companies); while equity-to-value ratio o these 63 transactions was30 percent (28.5 percent or manu acturing and 30.4 percent or non-manu acturing companies).

Table 1. Leverage-Intensity o 63 Large Private Equity TransactionsCarried Out by Eight Major PE Firms, 2002-2005 30

T t(63 c mp s)

M ct r g(18 c mp s)

n -m ct r g(45 c mp s)

D bt-t -e t

a 63 c s s 2.3 to 1 2.5 to 1 2.3 to 1M d 1.9 to 1 2.3 to 1 1.8 to 1h g st 8.8 to 1 8.8 to 1 7.0 to 1l w st 0.1 to 1 0.5 to 1 0.1 to 1

D bt-t -v a 63 c s s 70.0% 71.5% 69.6%M d 65.0% 69.6% 64.2%h g st 89.8% 89.8% 87.4%l w st 11.5% 34.5% 11.5%

e t -t -v a 63 c s s 30.0% 28.5% 30.4%M d 35.0% 30.4% 35.8%h g st 88.5% 65.5% 88.5%l w st 10.2% 10.2% 12.6%

26 Fenn, Goerge and Lian, Nellie. (1995, December). The Economics o the Private Equity Market. Board o Governors o theFederal Reserve System.

27 S&P Leveraged Commentary & Data, cited in Tenorio, Vyvyan, Anatomy o a Cycle, M&A Quarterly Review , January 25 2008.28 Data collected by McKinsey and Company or the Private Equity Council.29 As noted earlier, our sample contains 67 cases, but only 63 cases have equity and debt data at the time o acquisitions.30 The simple average debt-to-equity ratio o these 63 acquisitions was 2.2. Data collected by McKinsey and Company or the

Private Equity Council.


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This analysis shows, rst, that measured by debt-to-value, the leverage-intensity o major buyouts in recentyears, 70 percent, is considerably less than the 85 percent average debt-to-value measure or subprimemortgages and the maximum 80 percent leverage against market value (93 percent against ace value) per-mitted under Regulation T or investments in non-convertible corporate paper. 31 The debt-to-equity ratio or63 large private equity transactions o 2.3-to-1 and the median value o debt-to-equity ratio o 1.9-to-1 also

are very moderate compared to the comparable measures or the investment holdings o several other nan-cial institutions: The average debt-to-equity ratio o the balance sheets o the ve largest commercial bankholding companies in the late-1990s, or example, was 14-to-1, while the average debt-to-equity ratio o theve largest investment banks at that time was 27-to-1. 32 Even the highest debt-to-equity ratio in our sampleo large private equity transactions, at 8.8-to-1, appears modest in this context. 33 There are sound reasonswhy investment banks and commercial bank holding companies use high levels o leverage so long as theleveraged unds are invested in non-speculative, sound vehicles. Nevertheless, these measures show thatthe investments o the large private equity rms whose activities have raised concerns about systemic riskare much less leveraged than investments o much larger nancial institutions were in the highly-speculativeperiod o the late 1990s, when large subsequent losses did not produce systemic problemsand much lessleveraged than seen in the Bear Stearns, Lehman Brothers, Freddie Mac and Countrywide ailures that re-

cently produced such serious systemic problems. The 2.3-to-1 debt to equity ratio o private equity also isless than seen in many hedge unds. Convertible arbitrage unds, or example, have debt to equity ratiosaveraging 3.2-to-1. 34

The structure o the private equity business also distances it rom the conditions that produce systemicnancial crises. In the classical case, the ailure o one or a number o large, highly-leveraged investmentsthreatens the solvency o an institution, inducing some o its investors to bail out and orcing it to quicklysell other assets. This response, in turn, urther depresses both the value o the original investment and ocomparable assets held by other institutions. The combination depresses con dence in the troubled institu-tion and its share price, producing new losses or other investors on top o the losses o those institutionsholding comparable assets. I those institutions also are highly leveraged, they also may be orced to sell

other assets, depressing the prices o other classes o comparable assets. I other investors also pull out othe growing circle o damaged institutions, the losses may orce these institutions to pull back rom mak-ing new investment and loans, reducing liquidity across large parts o the market. A growing perception ocascading problems also may damage general investor con dence, producing declines in the stock marketor the currency; and in open, global capital markets, a stock market crash and currency crisis can lead to aninternational nancial crisis as the cascading problems cross borders.

When such nancial crises occur, they can depress a countrys economic per ormance or a considerable pe-riod. In what are commonly called the Big Five cascading nancial crises a ecting developed countries in thelast 30 years Spain in 1977, Norway in 1987, Finland in 1991, Sweden in 1991, and Japan in 1992 the sub-

30 The simple average debt-to-equity ratio o these 63 acquisitions was 2.2. Data collected by McKinsey and Company or thePrivate Equity Council.31 Data collected by McKinsey and Company or the Private Equity Council, General Securities Representative Study Manual,

Freddie Mac and Federal Reserve Board, Ibid .32 Report o the Presidents Working Group on Financial Markets (1999). Hedge Funds, Leverage and the Lessons o Long-Term

Capital Management, http://treas.gov/press/releases/reports/hedg und.pd .33 The large variations in these ratios across private-equity transactions are notable: Debt accounts or as little as 11.5 percent o

the value o a private-equity acquisition and as much as 89.8 percent.34 Scheneeweis, Thomas, Martin, Goerge, Kazemi, Hossein and Karavas, Vassilios. (2005). The Impact on Leverage on Hedge Fun

Risk and Return, The Journal o Alternative Investments; Report o the Presidents Working Group on Financial Markets (1999).Hedge Funds, Leverage and the Lessons o Long-term Capital Management.


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sequent decline in real GDP growth averaged more than 5 percent, and growth rates remained well below theirpre-crisis trend levels or three years. 35 The scal costs o cleaning up these nancial crises also can be verylarge. For example, the costs came to 6 percent o GDP or Sweden, 8 percent o GDP or Norway, 16 percento GDP or Spain, and 20 percent o GDP or Japan. While emergency steps thus ar have protected the U.S.capital markets rom a ull-blown, worst-case systemic crisis ollowing the collapse o subprime mortgage-

backed securities and their derivatives, those steps have not been able to prevent enormous systemic lossesand problems, with economic and budgetary costs very likely to be many hundreds o billions o dollars. 36

The business o private equity unds does not t this pattern o cascading losses and ailures. As noted, theinvestments o private equity unds generally are not excessively leveraged, especially in contrast to otherparts o the nancial system which are more likely to produce systemic risk. Further, most outside, limitedpartners in private equity unds are not highly leveraged themselves. Since 2000, pension plans and theendowments o oundations, universities and other non-pro t institutions have been the largest investors inthese unds. (Table 2, below) From 2000 through 2007, pension plans committed $42.9 billion to private equityunds, and endowments committed $35.3 billion, or respectively 23.1 percent and 19.0 percent o the $185.4billion raised by buyout unds. In addition, wealthy individuals and amilies whose investments in these unds

also are not leveraged accounted or 10.8 percent o the capital raised. By contrast, the leveraged, nancialinstitutions that can intensi y and transmit systemic problems play a relatively modest role in private equity:From 2000 to 2007, banks provided 12.4 percent o private equity und capital, and other nancial intermedi-aries and insurance rms companies another 9.7 percent and 7.4 percent respectively.

Table 2. Sources o Investment Capital or Private Equity Funds, 2000-2007 37

C mm tm ts($ m s)

S r T tC mm tm ts (%)

P s s $42,863.8 23.1% Public $22,634.4 12.2% Private $20,229.4 10.9%

e d wm ts/f d t s $35,248.7 19.0%B s $22,984.0 12.4%f m /i d d s $19,954.5 10.8%i t rm d r s $18,022.5 9.7%i s r c $13,782.5 7.4%f r g $13,368.8 7.2%C rp r t s $9,811.3 5.3%ot rs $9,407.1 5.1%Tt $185,443.1 100.0%

Private equity unds are also unlikely to trigger a systemic crisis in U.S. capital markets, because they investin individual companies rather than nancial instruments. The economic risks involved in private equity invest-ments are real, since acquired companies o ten are experiencing problems. Some companies seek out private

35 Bordo, Michael, Mizrach, Bruce, and Schwartz, Anna (1995). Real versus Pseudo-International Systemic Risk: Some Lessonsrom History, National Bureau o Economic Research, Working Paper 5371.

36 Reinhart, Carmen. and Rogo , Kenneth. (2008). Is the 2007 U.S. Sub-Prime Financial Crisis So Di erent? An InternationalHistorical Comparison, Working Paper.

37 Commitments by sources in buyouts unds and mezzanine unds, VentureXpert Thomson Financial.


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equity investors because their own nancial problems prevent them rom borrowing rom banks or raising undsthrough new public equity issues or corporate paper. Such di culties can present serious risks i a recessionoccurs, the rm nds itsel the subject o major litigation, or adverse changes occur in the rms regulatory envi-ronment. A recent study or the World Economic Forum o 21,397 private equity transactions rom 1970 to 2007ound that 6 percent end in bankruptcy or nancial restructuring, a higher bankruptcy rate than all U.S. pub-

licly traded companies but lower than the de ault rate or U.S. corporate bond issues.38

While large privately-held companies sometimes ail, and these ailures can be pain ul to those a ected, their ailures do not usuallyoccur suddenly; and a private equity und holding such a company can take steps to protect its solvency andoverall investing activities. Further, when such a company ails, the value o many o its physical assets may beuna ected and can be sold to limit the unds losses. In addition, the very large private equity transactions thatmight be o most concern in this regard usually involve more than one private equity und, limiting the exposureo any single und: Eight o the ten largest buyouts on record involved multiple private equity rms. 39

This investment pro le contrasts sharply with the nancial institutions and investment whose recent ail-ures raised genuine prospects o cascading capital-market problems. In the collapse o Long-Term CapitalManagement, Bear Stearns, Fannie Mae, AIG and others, speculative and highly-leveraged investments in

interest-rate derivatives and subprime and conventional mortgage-backed securities and their derivativescreated sudden losses that ar exceeded the value o the investments with their ormal leverage, which inturn orced the liquidation o other highly-leveraged investments, producing rising losses or its investors andeveryone else holding the same or closely comparable instruments. By contrast, the investments o privateequity unds in individual companies limit their exposure to no more than the value o that investment, itsleverage or loans to complete the purchase, and the acquired rms liabilities net o the value o its cash andother assets. These potential losses are known by the unds with some certainty, and their underlying assetsare much less subject to the sharp and sudden shi ts in value associated with speculation in interest rates,currency values, and housing prices ollowing a bubble. The contrast is even greater, when the nancial ex-posure associated with a privately held company is compared to the theoretically unlimited risks associatedwith the highly-leveraged options contracts and large-scale short sales undertaken by some hedge unds.

As a result, the value o the investments made by private equity unds is much less volatile and much morelimited than those seen in recent cases o systemic capital market problems. In the end, there are no moderninstances o a nancial crisis or widespread asset decline triggered by the ailure o a single company even avery large company such as Enron whether held by private equity unds or by other classes o investors. 40

The securitization o subprime and conventional mortgages also involves physical assets underlying theinitial instruments and their derivatives; but unlike companies held by private equity unds, the value o theunderlying housing assets had been distorted by the speculative bubble in housing prices and the practiceso many mortgage lenders, while the ratings practices applied to mortgage-backed securities and derivativesdistorted the perception o the risks assumed by many nancial institutions who invested in these instru-

ments and the institutions that provided their leverage. While some o the leverage used in private-equity

38 Gurung, Anuradha and Lerner, Jerry, co-editors, (January 2008), Globalization of Alternative Investments: The Global EconomicImpact of Private Equity Report 2008 , World Economic Forum, www.we orum.org/pd /cgi/pe/Full_Report.pd .

39 The two exceptions are the $31.1 billion KKR purchase o RJR Nabisco in 1988 and the Blackstone Groups $38.9 billion deal orEquity O ce Properties in 2006.

40 The ailure o a large and highly-leveraged company owned by a private equity und also could also entail considerable indirectadverse e ects, in lost jobs and reduced demand or the goods and services used by the ailed company. However, these e ects,along with those arising rom an acquired rms existing liabilities, would arise rom the companys ailure irrespective o itspurchase by a private equity und and cannot be claimed as part o the risk o private equity buyouts.


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buyouts is also securitized in collateralized debt obligations similar to those in the subprime mortgage area,the use o these instruments in private equity involves much less systemic risk because the two sectors areso di erent in scale relative to the markets potentially subject to that systemic risk.

The data show that the holdings o private equity buyout unds represent a very small share o the markets

that they would have to move, in order to create a systemic problem. Over 2000 to 2007, direct capital invest-ments by private equity buyout unds averaged $37.5 billion per-year, and among our sample o large buyoutsby major private equity unds, the holding period or these acquisitions averaged about three years. A recentstudy o worldwide leveraged buyout activity since 1970 has estimated the average holding period at aboutve years, although it also ound evidence that this period may be shorter in the United States. 41 The twoestimates suggest that at any point in time since 2000, the direct capital at risk in private equity investmentshas been $112.5 billion to $187.5 billion depending on the holding period used. Those levels are equal to

just 0.6 percent to 1.0 percent o the average total value o U.S. equities in the same period and 0.3 percentto 0.5 percent o the total value o corporate bonds at the end o this period. By contrast, the liabilities repre-sented by subprime mortgages alone in 2007 were $1.3 trillion, or seven to more than 10 times as great as allprivate equity buyout assets at risk. Those liabilities represented almost 13 percent o the total U.S. mortgage

market in 2007 and that does not include the even greater liabilities represented by the derivative instru-ments compared to private equity buyouts, which represent one percent or less o the equity market.

I we include the leverage used in private equity investments in these comparisons, the total value at risk inthe entire sector at any time, depending on the holding period used, averaged about $360 billion to $600 bil-lion rom 2000 to 2007, compared to o -balance sheet derivative positions o $1.25 trillion or a single hedgeund, Long-Term Capital Management, just be ore its collapse threatened a systemic crisis. The $360 billionto $600 billion total at risk is also equivalent to 3.1 percent to 5.3 percent o the average GDP over this period,compared to approximately 11 percent o GDP or both subprime mortgages and the derivative positions oLong-Term Capital Management. Similarly, the total average annual value at risk in private equity is equivalentto just 2.6 percent to 4.3 percent o the average annual value o all corporate equities. Moreover, the loans or

leverage or all private equity deals averaged about $83 billion per-year in this period, or the equivalent o lessthan 3 percent o the $2,902 billion in average annual borrowings or all purposes, and less than 8 percent oannual mortgage lending o $1,132 billion per-year in this period. 42

In brie , private equity unds occupy a place in the capital markets that is likely too small to trigger broad,cascading nancial market problems.

In contrast to the losses arising rom the subprime mortgage-backed security crisis or the end o the dot-comstock bubble, the investments o individual private equity unds and the buyout sector as a whole also arehighly diversi ed across industries and sectors. Table 3, next page, shows that o $299.3 billion invested in14,408 buyout transactions rom 2000 to 2007, consumer-related companies accounted or 10.8 percent o the

transactions and 14.7 percent o total private-equity investment; industrial companies, including energy andsemiconductor rms, accounted or 18.0 percent o the transactions and 21.2 percent o the total investment;computer rms represented another 16.0 percent o transactions and 9.6 percent o total investment; and

41 Gurung, Anuradha and Lerner, Jerry, co-editors, (January 2008), Globalization of Alternative Investments: The Global EconomicImpact of Private Equity Report 2008 , Working Papers, Volume 1, World Economic Forum,www.we orum.org/pd /cgi/pe/Full_Report.pd .

42 Board o Governors o the Federal Reserve System, Flow o Funds Accounts o the United States,www. ederalreserve.gov/releases/zl/Current/data.htm.


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health care concerns accounted or 13.3 percent o transactions and 9.5 percent o investment. 43 The privateequity sector, there ore, is generally as insulated rom sectoral stresses and losses as the overall stock market;and the diversi cation o these unds provide another barrier to broad, cascading nancial market problems.

Table 3. Distribution o Buyout Transactions, Companies, and Investments, By Economic Sector, 2000-2007 44

ec m c S ct r Tr s ct s i stm t a S ct rs 14,408 $299.3 b

Consumer Related 10.8% 14.7% Industrial 18.0% 21.2%Communications 8.6% 12.1%

Internet Specifc 15.6% 7.8%Computer (so tware & hardware) 16.0% 9.6%

Health 13.3% 9.5% Financial/Business Services 9.0% 7.3%Others 8.6% 17.9%

As a result, the private equity sector also is less liable to be seriously a ected by the speculative distortionsthat play an important role in many systemic nancial crises. The most common systemic problems in mod-ern times have involved asset bubbles in which speculation had driven up the prices o a class o assets orequities, producing unusually high valuations which subsequently ell sharply and suddenly. The subprimemortgage-backed security problems arose a ter an historic run up in housing prices: The O ce o FederalHousing Enterprise Oversight reports that rom early 1997 to early 2007, housing prices in Boston, Chicago,Denver, New York, San Diego, and Washington, D.C., increased by an average o 141 percent. 45 This sharpand sustained run-up produced the initial market or subprime mortgages, the subsequent markets or mort-gage-backed securities and the derivatives based on those securities, and the expansion o these markets bynancial institutions with enormous leverage, which together created systemic risks and ultimately producedsystemic problems. Similarly, during the dot-com bubble o the late 1990s, the shares o many venture capi-tal-backed technology companies sold or more than 150 times their earnings or an in nite multiple in theace o no earnings and the price-earning (P/E) ratio or even the broad-based S&P 500 at that time wasnearly 44, or almost 2.75 times greater than the indexs historic P/E average o 15.9. 46 Even i a private equityund partnership invests in a bubble-a ected sector, the diversity o private-equity und port olios would limitits losses when the bubble bursts.

There is other evidence that the value o the holdings o private equity unds are not generally a ected bythe speculative evers that o ten contribute to systemic crises. Privately-held companies do not have publicstock prices and there ore we cannot analyze mark to market price-earnings ratios or signs o speculative

excess. However, another measure called the enterprise value multiple (EVM) provides some insight. Whilea price-earnings ratio is calculated by dividing the price per-share by the net earnings per-share, the enter-

43 We also used data rom 1970 to 2007 to calculate the composition o private equity investment. The percentage o breakdownsis very similar to 2000-2007 data.

44 Annual disbursements, including only buyout-related deals in the U.S, VentureXpert Thomson.45 www.o heo.gov/hpi_download.aspx. The 1997-2007 price increases by city: Boston, 135 percent; Chicago, 92 percent; Denver,

81 percent; New York, 166 percent; San Diego, 211 percent; and Washington, D.C., 171 percent.46 Bogle, J. (2001). A Tale o Two Markets, Bogle Financial Markets Research Center,

http://www.vanguard.com/bogle_site/sp20010416.html


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prise value multiple is calculated by dividing the companys total value by its total earnings be ore interest,taxes, depreciation and amortization (EBITDA). The price-earnings ratio and the enterprise value multiple arenot strictly technically comparable. 47 Nevertheless, the ratio o the value o rms purchased by private equityunds to their earnings (be ore interest, taxes, depreciation and amortization) appears to be very moderate.Our analysis o the sample o 63 large private equity purchases carried out by eight major private equity rms

rom 2002 to 2005 shows that the EVM or those acquisitions was 9.3 and their median EVM was 8.9.48

Table 4. Enterprise Value Multiple o 63 Large Private Equity Transactions

Carried Out by Eight Major Funds, 2002-2005 49

e t rpr s v M t p T t(63 c mp s)M ct r g(19 c mp s)

n -m ct r g(44 c mp s)

a 63 c s s 9.3 9.0 9.5M d 8.9 8.3 9.0h g st 22.7 18.6 22.7l w st 4.2 4.2 4.5

Finally, the terms o the limited partnerships in private equity unds create an additional barrier to the onset oa systemic nancial panic or crisis triggered by large losses. Unlike the speculators who purchased dot-comcompany stocks on the secondary markets or the nancial institutions holding subprime mortgage-backedsecurities and their derivatives, the outside investors in private equity unds cannot liquidate their holdingswithout providing considerable advance notice. As a result, the immediate pressures on the capital o a pri-vate equity und or one o its partnerships rom the ailure o any single investment, no matter how large, arelimited to the losses rom that ailure, creating something o a rewall against the cascading e ects typical osystemic nancial crises.

The SySTeMiC finanCial CRiSiS of 2008 anD The PRivaTe equiTy SeCToR

The private equity sector, then, draws on a number o basic actors and conditions which mitigate the pros-pect o the systemic problems and risks triggered by the collapse o the subprime mortgage market and nowevident in the ailures o Bear Stearns, Countrywide, Lehman Brothers, Fannie Mae, Freddie Mac, AIG, andMerrill Lynch, and ongoing threats to other nancial institutions. Each has its own particular characteristics,but the crisis that overtook Bear Stearns, the rst to all, was generally typical. The roots o the crisis lay inunds it established and initially unded to trade collateralized debt obligations (CDOs) backed by subprimemortgage-backed securities. As U.S. housing prices rose and the market or subprime mortgages expanded,especially adjustable rate subprimes, the unds returns increased, which enabled it to attract more inves-tors, including other nancial institutions, and to borrow much more rom other nancial institutions. Theund invested the new capital and borrowings in more mortgage-backed securities, CDOs, and a new orm ocredit derivative called credit de ault swaps (CDS), also re erencing mortgage-backed securities, in which

47 According to IRS corporate returns, the sum o interest, taxes, depreciation and amortization or all reported companies acrossall industries, which constitute the di erence between net earnings used in price-earnings and the earnings data used in theenterprise value multiple, averaged 9.4 percent o earnings over 2002-2005. See Internal Revenue Service, 2005 CorporateReturns Basic Tables. Returns with Net Income; www.irs.gov

48 We use purchase prices, including direct capital and leverage, as a proxy or enterprise value (in lieu o purchase price plusexisting debt minus cash on hand), due to data constraints.

49 Data collected by McKinsey and Company or the Private Equity Council.


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investors received payments in exchange or a promise to pay i the underlying securities de aulted. By thetime o the crisis, the und was leveraged at 15-to-1, and its parent company was leveraged at nearly 33-to-1.When the U.S. housing market began to all, the adjustable rates on subprime mortgages began to rise, andthose mortgages began to ail at elevated rates, substantial numbers o investors in the Bear Stearns undand other Bear Stearns products liquidated their holdings in the und and its lenders moved to call in loans.

The und had to sell highly-leveraged assets which were alling in value so sharply and quickly that the unditsel ailed, and Bear Stearns losses in the und and elsewhere le t it insolvent. The systemic crisis that ol-lowed arose rom rst the direct losses incurred by other nancial institutions with large holdings in the BearStearns und, much o which also was leveraged, and even more important, rom their own highly-leveragedport olios o mortgage-backed securities, CDOs, and credit de ault swaps. As the subprime and conventionalmortgage markets turned down sharply, rating agencies downgraded the securities and market demand orthem plummeted, orcing institutions across the nancial system holding those securities and the CDOs andCDSs backed by them to write down very large losses. In many cases, including Lehman Brothers, FannieMae, Freddie Mac, Merrill Lynch and AIG, the wave o debt that overtook Bear Stearns nally overtook themas well. These write downs and ailures, in turn reduced liquidity and produced a credit squeeze a ectingother business borrowers and the institutions holding shares or debt rom those borrowers. More important,

they threatened an even broader crisis across the banking system that nally produced the extraordinaryederal interventions o September 2008.

The credit crunch triggered by the cascading losses and ailures arising rom subprime and conventionalmortgages and the securities and derivatives backed by them has a ected the availability o loans or lever-aged buyouts. However, private equity unds have not taken direct losses in this crisis, since they invest incorporations and not in debt instruments or the securities backed by them. Further, their investments aremuch less highly-leveraged, at about 3 to 1, than those o the nancial institutions holding the securities andderivatives that triggered the crisis o Autumn 2008. While a large company held by a private equity und couldail, moderate leverage and the likelihood that such a large company was held by more than one und wouldlimit the potential losses o the partnership(s), its investors including nancial institutions, and its lenders.

Finally, the port olios o these unds are so diversi ed across industries that a crisis in a single sector such ashousing would not threaten the entire port olio and orce the liquidation o large numbers o other assets.

ConCluSion

Based on their organization and operations, modern private equity unds present little i any realistic prospecto triggering cascading losses and systemic problems in U.S. capital markets. Their distinctive economicoperation is to improve the use and value o existing assets by channeling new capital and strategic and op-erational expertise to turn around distressed rms and expand the reach and potential o healthy ones. Annualinvestments in private equity transactions have grown more than 350 old since the 1970s, because this ap-proach have been nancially success ul: From the early 1980s to the mid-1990s, or example, the annual re-

turns o 73 private equity unds averaged about 17.5 percent a year, compared to 9.4 percent and 10.9 percenta year or the S&P 500 and Nasdaq indexes. 50 Private equity unds provide many institutions and individualstheir only opportunity to invest directly in the turn-around or expansion operations o non-public companies.

Borrowed unds provide the majority o nancing or private equity acquisitions, raising concerns about sys-temic risk or U.S. capital markets in the event that a large holding by a major private equity und should ail

50 Ljungqvist , Alexander and Richardson, Matthew, op. cit .


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suddenly. Our analysis concludes that the private equity sector does not present a systemic risk to U.S. capitalmarkets. The debt carried in large private equity transactions, as a share o their market value or their equitycomponent, is not only much less than seen in two recent instances which triggered systemic problems, theailures o Long-Term Capital Management and, more recently, Bear Stearns, Lehman Brothers, Fannie Mae,Freddie Mac and others, but also substantially less than the balance sheet leverage o large commercial bank

holding companies, the legally-permitted leverage o non-convertible corporate paper, or the leverage ohedge und arbitrage activities. The ownership o private equity unds also reduces the potential that the ail-ure o a private equity-owned company or a private equity partnership could set o cascading losses a ectingthe balance sheets o banks and other nancial institutions. The banks and other nancial institutions thatprovided most o the nancing or subprime mortgages and the speculation in the securities and derivativesbacked by them hold less than one-third o private equity unds. Further, the terms o investment in privateequity unds entail considerable notice and restrictions or investors who want to withdraw their capital, pre-venting much o the cascading panic responses seen in systemic capital market crises.

The nature o the holdings o large private equity unds also reduces the potential o their triggering a systemiccrisis. These unds invest in individual companies with real physical and intangible assets, rather than the

derivative instruments associated with recent systemic problems, and that ocus limits the unds downsideexposure to unwise decisions and sudden market shi ts. Large private equity unds also maintain investmentport olios that are highly diversi ed across economic sectors, urther limiting their exposure to market breaksin particular industries, as seen most recently in the collapse o the dot-com and housing bubbles. Further-more, modern systemic capital-market crises typically start with a sharp slide in a speculative market, andthere is no evidence o speculation or highly-infated pricing in the holdings o private equity unds. The privateequity sector also is probably too small to trigger broad, cascading nancial market problems, with net capitalassets equal to less than 1 percent o all corporate public equities, leverage equal to less than 3 percent o an-nual borrowings, and total holdings equal to less than hal o the subprime mortgage market or the derivativepositions o Long-Term Capital Management be ore its collapse. We conclude that the private equity sectorpresents very little risk o triggering a systemic crisis in U.S. capital markets.


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RefeRenCeS

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Bogle, J. (2001). A Tale o Two Markets, Bogle Financial Markets Research Center,http://www.vanguard.com/bogle_site/sp20010416.html

Bordo, Michael, Mizrach, Bruce, and Schwartz, Anna. (1995). Real versus Pseudo-International SystemicRisk: Some Lessons rom History, National Bureau o Economic Research, Working Paper 5371.

Cao, Jerry, and Lerner Josh. (2006). The Per ormance o Reverse Leveraged Buyouts. NBER Working Pa-per, http://www.people.hbs.edu/jlerner/RLBOPer ormance.pd .

Center or Responsible Lending (2007). A Snapshot o the Subprime Market.

Chan, Nicholas, Getmansky Mila, Haas, Shane, and Lo, Andrew. (2005, March). Systemic Risk and HedgeFunds National Bureau o Economic Research, Working Paper No. 11200.

Ernst & Young. Private Equity. (2007). How Do Private Equity Investors Create Value? A Study o 2006 Exitsin the US and Western Europe.

Fenn, George, and Lian, Nellie. (1995, December). The Economics o the Private Equity Market. Board oGovernors o the Federal Reserve System.

Freddie Mac and the Subprime Market, Freddie Mac,

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Gurung, Anuradha, and Lerner, Jerry, co-editors, (January 2008), Globalization of Alternative Investments:The Global Economic Impact of Private Equity Report 2008 , World Economic Forum,http://www.we orum.org/pd /cgi/pe/Full_Report.pd .

Ljungvist, Alexander and Richardson, Matthew. (2003). The Cash Flow, Return and Risk Characteristics oPrivate Equity. NYU Finance Working Paper No 03-001.

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New York Times (2007, February 26). The Top 10 Buyouts.


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Private Equity Council (2007). Public Value: A Primer on Private Equity,http://www.privateequitycouncil.org/wordpress/wp-content/uploads/pec_primer_layout_ nal.pd .

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aBouT The auThoRS

R b rt J. S p r is the chairman o Sonecon, LLC, a private rm that advises senior o cials and executiveso U.S. and oreign businesses, governments, and non-pro t organizations. Dr. Shapiro has advised, amongothers, U.S. President Bill Clinton and British Prime Minister Tony Blair; private rms including Amgen, AT&T,

Gilead Sciences, Google, MCI, Inc., SLM Corporation, Nordstjernan o Sweden, and Fujitsu o Japan; andnon-pro t organizations including the American Public Transportation Association, the Education FinanceCouncil, the U.S. Chamber o Commerce, and the American Petroleum Institute. He is also a Senior Fellow othe Progressive Policy Institute (PPI), director o the NDN Center on Globalization, co-chair o Argentina TaskForce America, and a director o the Ax:son-Johnson Foundation in Sweden. From 1997 to 2001, he was Un-der Secretary o Commerce or Economic A airs. Prior to that, he was co- ounder and Vice President o PPI.Dr. Shapiro also served as the principal economic advisor to Bill Clinton in his 1991-1992 presidential cam-paign, senior economic advisor to Albert Gore, Jr. and John Kerry in their presidential campaigns, LegislativeDirector or Senator Daniel P. Moynihan, and Associate Editor o U.S. News & World Report . He has been aFellow o Harvard University, the Brookings Institution, and the National Bureau o Economic Research. Heholds a Ph.D. and M.A. rom Harvard University, an M.Sc. rom the London School o Economics, and an A.B.

degree rom the University o Chicago.

n m D. P m is the ounder and president o NDP Group, LLC, an economics consulting rm that special-izes in assessing complex issues in nance, international trade, and economic development. Clients o NDPGroup include U.S. and oreign corporations, nancial institutions, ederal and local governments, trade as-sociations, and multi-national organizations. Prior to ounding NDP Group in 2000, Dr. Pham was Vice Presi-dent at Scudder Kemper Investments in Boston, where he was responsible or research, asset allocationsand currency hedges or global and international bond unds. Be ore that, he was Chie Economist o the

Asia Region or Standard & Poors DRI in Boston. Dr. Phams also has extensive experience in multinationalorganizations and government agencies, including service as an economist at the World Bank and consul-tant to the Department o Commerce and the Federal Trade Commission. Dr. Pham also has been an adjunct

pro essor at the George Washington University, where he has taught monetary economics, international tradeand nance, macroeconomics and microeconomics. Dr. Pham earned a Ph.D. in economics rom the GeorgeWashington University with concentrations in international trade and nance, economic development andapplied microeconomics, a M.A. rom Georgetown University, and a B.A. rom the University o Maryland.

Documents

Role of Private Equity in US Capital Markets - Sonecon Oct-2008