The Bright and Dark Side of Staging: Investment Performance and the Varying Motivations of Private Equity Firms

46 Pages Posted: 21 Mar 2006

See all articles by Philipp Krohmer

Philipp Krohmer

CEPRES - Center of Private Equity Research; Goethe University Frankfurt - Department of Finance

Rainer Lauterbach

University of Pennsylvania; Goethe University Frankfurt - Department of Finance

Victor Franco M. Calanog

University of Pennsylvania - The Wharton School

Date Written: November 2006

Abstract

The stepwise allocation of capital from a private equity fund to a portfolio company is known as staging. Theoretical studies assert the importance of staging as a mechanism to manage an investment and to influence its success, but empirical papers are divided as to whether staging has a positive or negative effect on investment performance. We create a unique dataset by merging the Venture Economics and CEPRES* databases. This unique database allows us to measure the influence of staging in financing rounds and exact tranches on investment returns. We are also able to specify an accurate measure of cash-flow based IRR, in contrast to previous studies that were hampered by insufficient data. We analyze 712 matched Private Equity and Venture Capital investments, spanning 1,549 financing rounds and 2,329 precisely dated cash injections during the period from 1979 to 2003. Our results show that during the initial investment phase, the investor uses staging foremost as monitoring instrument to mitigate agency problems and to provide resources that positively influence investment performance. Staging has little impact on return during the maturity phase. However, during the pre-exit phase we find evidence that investment managers face a termination dilemma and do not rigorously use staging as an option to terminate unsuccessful investments at the appropriate time. Rather, they use staging as a turnaround attempt, and partially for window dressing purposes. This kind of motivation behind staging is equivalent to "throwing good money after bad." The influence of staging on investment returns depends critically on the motivations behind its use.

Keywords: Venture Capital, Private Equity, Financing, Staging, Investment Decisions, Liquidation

JEL Classification: G24, G11, G33

Suggested Citation

Krohmer, Philipp and Lauterbach, Rainer and Calanog, Victor Franco M., The Bright and Dark Side of Staging: Investment Performance and the Varying Motivations of Private Equity Firms (November 2006). AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=891711 or http://dx.doi.org/10.2139/ssrn.891711

Philipp Krohmer

CEPRES - Center of Private Equity Research ( email )

Max-Joseph-Strasse 7
Munich, 80333
Germany

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Grueneburgplatz 1
Frankfurt am Main, Hessen 60323
Germany

Rainer Lauterbach

University of Pennsylvania ( email )

Philadelphia, PA 19104-6370
United States

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Grueneburgplatz 1
Frankfurt am Main, Hessen 60323
Germany

Victor Franco M. Calanog (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States
646-703-3886 (Phone)
646-473-1167 (Fax)

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