Editor’s Letter

While there is always change, some factors have a more significant impact than others—depending on the perspective of the observer. For example, there are fundamental changes occurring in the U.S. and global economies that may have an impact on the private equity traditional business model. Some of these structural changes that may alter the variables used by private equity companies to guide investment decisions include:

• • Technology and knowledge creation are increasing at what seems to be an exponential rate. Consequently, not being a serious player on the cutting edge of change is a huge disadvantage.

• • The dissemination of information, data, and knowledge is increasingly time-compressed, and globally mobility is expanding competition for creativity.

• • The cost of education to obtain foundational knowledge and critical and creative thinking skills is becoming more expensive; thus narrowing the universe of thought leaders in specific areas to those that are wealthy.

• • In this environment of aging populations, in the U.S., there is a shift in the ratio of prime age to invest in stocks to prime age to sell in retirement. But this pattern to sell securities is not evident overseas, which may increasingly attract more foreign funds to U.S. stocks.

• • There is stagnation in real wages for most workers since the early 1960s, forcing mass consumers to carry higher debt levels for healthcare and education. In the U.S., median income fell 5% during 2010-13 despite a 4% average gain in family incomes.¹ A large supply of under- and unemployed labor and weak unions continues to limit pressure for future average real wage increases. Only China among major economies overseas has seen strong real wage growth. Meanwhile, wealth is increasing and more concentrated in the top 1% of the population (senior corporate executives) who are the major savers and benefit increasingly from equity income. Expanding global capital flows creates new opportunities overseas to sustain the growth of wealth and tap lower-cost foreign labor.

• • Since the mid-1970s there has been a widening disconnect between productivity and worker’s compensation as labor-saving technology has given a larger piece of the income pie to the owners of capital.

• • Prolonged low interest rates and inflation rates no longer provide good indications of meaningful financial and investment risks.

In this issue of The Journal of Private Equity, several articles begin to examine the impact of these structural change trends on the private equity industry and its business model.

The article by Adrian Oberli, “Private Equity Asset Allocation: How to Recommit?” analyses a recommitment strategy against an asset allocation strategy. His research shows that annually recommitting distributions and the rebalancing amount—both weighted by the inverse of the current period investment degree—optimizes institutional investors’ private equity allocation.

Next, Jeffrey Overall and Sean Wise in “An S-Curve Model of the Start-up Life Cycle Through the Lens of Customer Development,” re-examine in detail the S-curve model of entrepreneurship, start-up funding, and customer development as a theoretical foundation. The analysis serves as an illustration of ways of incorporating aspects of the changing structural environment into the private equity investment decision process.

William Heitman in “A Private Eye for Private Equity,” focuses attention on the investor’s process of scouring portfolios for more value. The usual result is to drop unprofitable products and buy more technology. Digging more deeply, the author suggests examining the busy-ness of existing “knowledge workers” and sugests it may not be so virtuous.

Sven De Cleyn, Jasmine Meysman, and Johan Braet, in an article “A Critical Assessment of the Non-Disclosure Agreement in the Framework of the Technology Transfer Process: A Longitudinal Study,” address the protection of confidential information provided by the non-disclosure agreement (NDA). The NDA is analyzed, and reflection on the rather unusual elements reveal interesting topics for discussion.

The next article by Eva Davis, Monique Robinson, and Josh Birenbaum, “Nine Tips for Venture Capital and Private Equity Funds Following In re Nine Systems Corporation Shareholders Litigation” examines the process by which related-party transactions are conducted, approved and ultimately consummated. At issue is fairness of treatment in significant transactions where venture capital or private equity representatives who serve on the boards of directors of their portfolio companies may be treated more favorably than other holders of equity or other classes of equity.

Laurence Smith examines the issue of “Control Through Observer Rights and a CRO.” Two of the weapons in the arsenal of a second lein, mezzanine, or other leveraged lender are observer rights and the ability to mandate that a borrower engage a chief restructuring officer (CRO). The article investigates those rights when there exists a relative balance between legitimate interests of borrower and lender.

Priya Roy in “Maximizing Value in the Real Estate Private Equity Space: Expansion, Competition and Alliance” focuses on the changing real estate landscape and sees an interrelatedness of three concepts. These are: management of a globally expanding competitive landscape , expansion into new markets as a result of that competitive landscape, and strategic alliances as a viable means to achieve this expansion.

The next two articles deal with international issues in different sectors and different countries.

“Research and Analysis on Alternate Investment Options for Public Sector Undertakings (PSUs): Is the Orthodox Government Ready to Trade Off Risk for Profitability Amid Strict Guidelines?” by Suresh Bihari and Anuj Sharma, examines the risk-for-profitability trade-off of orthodox government regulatory decisions in India. PSCs, which are highly profitable, don’t utilize all investment strategies because of government guidelines on the investment of surplus cash. The authors explore alternative investments of surplus funds within government guidelines that yield both greater returns and liquidity.

In “To Invest or Not Invest in a Distressed Hospitality Sector: The Case of Tunisia,” Eymen Errais spells out a decision making process. The steps in the process include: review the causes of the tourist sector crisis, understand the key requirements for a suitable solution, analyze the valuation process, and provide recommendations to undertake profitable investments.

F. John Mathis

Editor

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