Archive for 3 July 2008
The Puzzle of the Publicly Held Private-Equity Firm
| Peter Klein |
Like many observers, I was puzzled by last year’s IPO of the Blackstone Group, one of the nation’s largest private-equity firms. After all, the ability of PE firms to restructure and improve poorly performing companies owes a lot to their isolation from the day-to-day pressures of satisfying public investors. PE firms already face potential agency conflicts between their general partners and the managers of their portfolio companies, and between their general and limited partners; why add agency problems between the partners and public shareholders? Has the credit squeeze raised the cost of debt finance that much?
Today’s WSJ reports that KKR, which considered going public last year but pulled out, is again pondering an IPO:
The storied corporate-buyout firm has quietly and aggressively hired a battery of executives in recent months, creating an organization chart that looks remarkably similar to that of a public company. It has brought on a general counsel, a public-affairs chief, a chief compliance officer, a chief technology officer, a chief talent officer and a chief human-resources officer. . . .
[P]eople close to KKR acknowledge that it is still keen on becoming a public company and a raft of recent shifts, including the hiring spree, speak to a broader change at the firm and how it views its business.
Perhaps the publicly held PE firm is best described as a new hybrid form, an organization that combines the governance advantages of private equity with the lower capital costs of the publicly traded corporation. Or does it combine the worst features of both?
Award-Winning CEOs
| Peter Klein |
They make more money, sit on more boards, write more books, and have lower golf handicaps than CEOs of similarly performing firms who haven’t won awards (e.g. from Business Week). However, according to a new paper by Ulrike Malmendier Geoffrey Tate, their firms perform poorly after they win awards, compared to a matched set of firms headed by rank-and-file CEOs.
Compensation, status, and press coverage of managers in the U.S. follow a highly skewed distribution: a small number of “superstars” enjoy the bulk of the rewards. We evaluate the impact of CEOs achieving superstar status on the performance of their firms, using prestigious business awards to measure shocks to CEO status. We find that award-winning CEOs subsequently underperform, both relative to their prior performance and relative to a matched sample of non-winning CEOs. At the same time, they extract more compensation following the award, both in absolute amounts and relative to other top executives in their firms. They also spend more time on public and private activities outside their companies, such as assuming board seats or writing books. The incidence of earnings management increases after winning awards. The effects are strongest in firms with weak governance, even though the frequency of obtaining superstar status is independent of corporate governance. Our results suggest that the ex-post consequences of media-induced superstar status for shareholders are negative.
The pointer is from Justin Lahart, who blogs for the WSJ.
Organizations and Markets 
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