Josh Lerner, the Jacob H. Schiff Professor of Investment Banking at Harvard Business School, founded the Private Capital Research Institute, Boston, to advance understanding of private capital and its economic and investment impact. In large part to aid that effort, the PCRI is building an extensive database for research on private equity by academics and practitioners.
In response by e-mail to questions about his work, Mr. Lerner discussed the progress on developing the database and related issues.
A Pensions & Investments story last April 16 reported you had 15 private equity firms as initial contributors. How much invested capital in total do they represent? What percent is that invested capital in your database to the entire capital of U.S. private equity? How many more have you sought and gotten? And their invested capital?
Mr. Lerner: These are great questions, which I do not fully know the answers to. Our initial announcement covered some of the largest firms, such as Apollo (Global Management LLC) and Carlyle (Group LP). The idea of this announcement was not to report on the participation of a comprehensive set of firms, but rather to “start the ball” rolling with a critical mass of influential firms.
We have subsequently signed up additional firms, and will continue to do so in the months and years to come. This is definitely a multiyear project!
What data are you seeking?
Mr. Lerner: We are essentially developing two databases: one at the fund level (e.g., funds raised, drawdowns and distributions) and one at the transaction level (transaction characteristics, structures and outcomes). This will allow a fairly full examination of the crucial questions related to private equity.
Does your project include venture capital firms?
Mr. Lerner: We had to start somewhere, so we began with private equity groups, given their greater size and the intense scrutiny they have been under. We plan to expand our efforts to include the venture community over the next year.
How comprehensive are the data?
Mr. Lerner: We realized from the beginning that we were unlikely to get comprehensive data. In particular, many firms have exited the industry, and not all firms will participate in the best of circumstances.
So we have taken the approach of combining the data we receive from firms with that provided by a number of commercial data providers. The idea is that the commercial data, while not perfect, allows us to see what we are missing in terms of proprietary data, and to assess the completeness and any potential biases in what we have. …
(The) information varies by firm. In many cases, firms have been providing information on all their transactions. In others, electronic records do not go back to the inception of the firm's activities, and we are only able to receive the newer transactions.
Again, because we are combining the proprietary and commercial data, we will be able to assess what we do and do not have.
How are the data verified?
Mr. Lerner: We will be able to highlight discrepancies with the commercial data, and seek to understand any differences working with the firms.
Are you enlisting any pension funds or other asset owners that invest in private equity to help in the creation of the database?
Mr. Lerner: Representatives of a number of limited partners, such as (the US$173 billion Canada Pension Plan Investment Board, Toronto; the $112 billion Teacher Retirement System of Texas, Austin; and the $42 billion Korean Investment Corp., Seoul) have been helping in this effort in several ways. These have included serving on the practitioner advisory board of the PCRI, providing strategic advice on how to approach groups and what research questions would be top priorities for them, and contacting their general partners on our behalf. So far, we have not asked limited partners directly for data, due to the ambiguities surrounding who owns the performance data.
In your promotion of the database, you mention that group and company names won't be identified in the data.
Mr. Lerner: Essentially, the groups are providing the data to us in identified form. These identifications, however, will be only used by the PCRI staff. The researchers will use the information in “blinded” form, with the individual groups and portfolio companies not being identified.
The reason this approach … works is because of the nature of academic research. Academics are less interested in the question of how some individual group or deal performed, but rather how categories of deals and transactions (e.g., funds that grow rapidly in size, deals done at the top of the market) perform.
This allows us to address private capital groups' concerns about exposure while creating a database that will be highly useful for academic research.
Can research be as robust when such information is masked, compared to research with publicly traded equities?
Mr. Lerner: Clearly, private capital is less transparent than public equities. This effort will be a step forward in making high-quality data available to a broad pool of academics, and increase the amount of knowledge about the industry available to academics and practitioners alike. But even in a perfect world, we will still find it more challenging to understand private capital than public equity markets.
What control will the contributing private equity firms have on the database?
Mr. Lerner: One of the key design elements of PCRI from the beginning has been the independence of the research conducted here. Whether the results of the studies are flattering to the industry or not, the credibility of the PCRI effort is inherently linked to the ability of researchers to freely publish their findings.
When will the database be available?
Mr. Lerner: We anticipate the first beta users will be undertaking research using the data (by (June).
You have referenced the Center for Research in Security Prices in promoting your project. Is the creation of the private equity database sort of like the creation of CRSP for publicly traded equities?
Mr. Lerner: Yes, our goal is to make a similar kind of high-quality data on private capital readily available to researchers, just as CRSP did with public markets data in the 1960s.
Why will the database be housed at the University of Chicago's National Opinion Research Center? Why not the CRSP or somewhere else?
Mr. Lerner: The NORC is the premier home for hosting proprietary data and making it available for researchers. They have designed a protocol where researchers access databases through dedicated devices, uploading data queries and then downloading results (after they are reviewed). Numerous federal agencies have used NORC to host highly sensitive data that they have sought to make available to researchers. Given this experiences, we felt that NORC would be an ideal partner ….
Are the supporters listed on the PCRI website financing the creation and maintenance of the private equity database? Are there others?
Mr. Lerner: So far, we have had a number of organizations providing us with data and facilitating data transfer, which are acknowledged on the website. We have deliberately avoiding raising financing from industry to maintain the independence of the PCRI — to date; our sole institutional funder has been the Kauffman Foundation. We plan to continue to fund the PCRI through foundation support.
Is Harvard involved in your database project? Any other universities involved?
Mr. Lerner: Our effort is a stand-alone non-profit, but Harvard Business School has generously provided us with free office space ... We have an academic advisory board, which consists of leading private equity scholars from schools including Duke, London Business School, London School of Economics, MIT, Stockholm School of Economics and the University of Chicago.
Your project aside, what private equity databases do academics now have for their research?
Mr. Lerner: There are any number of commercial databases on private equity investments available. These pose, however, two challenges. There are inconsistencies across the databases, which lead to different answers even on some of the most important questions for limited and general partners, such as whether superior performance persists or not across funds. The access to the commercial databases is often tightly restricted, which poses difficulties especially to graduate students and younger scholars, who typically introduce many of the fresh ideas into fields. By creating a high-quality academic database, and making it widely available to scholars, we hope to address these concerns.
Do you plan to create, or hope that researchers who use the database create, a private equity index, so investors have a better benchmark?
Mr. Lerner: We do not plan to enter into the benchmark business, leaving those kinds of activities to commercial entities. Nonetheless, the database should allow researchers to say much more about what drives private equity performance, as well as the relative performance of private and public markets.