A new joint study by the Technical University Munich and the University in Bonn shows that it is not possible to generalize with regard to financial investors. Quite often private equity funds, which are frequently critized, want to provide long-term support to the company they invest in. Therefore, investment by private equity funds is quite often long-term investment. With regard to hedge funds, however, it seems to be true that the one and only objective of such funds is the short-term increase of share holder value.
While hedge funds deal with stocks, commodities, currencies and highly speculative financial derivatives, the core business of private equity funds are investments in companies. Thus, the authors of the study in question looked at the investment motives of financial investors on the German capital market. They analised 57 private equity and 96 hedge funds.
They found out that the opinion of financial investors exclusively concentrating on short term profit of their capital owners is too undifferentiated. Private equity funds are closed funds. Before investing they pool money from solvent investors. This money is than bound for a certain period of time agreed upon in advance. Share holders cannot withdraw their money before this fixed date. The investors in hedge funds, however, may withdraw their money at relatively short notice.
Thus, private equity funds invest over a much longer period of time in a given company than hedge funds. On average, investors invest their money for a period of ten years. This time is used by private equity funds to make a company more competitive in the long run.
In order to put their plans into practice, private equity funds prefer majority stake holdings in companies: those funds analysed in the study in question most of the time held more than 30% of a company’s capital. “At the end of the day it is of course financial motives which are most important to private equity funds as well”, says Mr. Dr. André Betzer from Bonn university. “However, private equity funds have more time for making profit at their disposal and in order to reach this objective they use more sustainable measures.”
To small and medium-sized entities (SMEs) which are the target of financial investors or are actively looking for them the study in question provides valuable information in order to assess these investors. The complete study in English is available for free-of-charge download.