Replicating Private Equity with Value Investing,
Homemade Leverage, and Hold-to-Maturity Accounting
featuring Erik Stafford, John. A. Paulson Professor of Business Administration
Private equity buyout funds tend to select small firms with distinct value characteristics like low EBITDA multiples and low recent net equity issuance. Public equities with these characteristics have high risk-adjusted returns after controlling for common factors. Adding the average incremental leverage used in leveraged buyouts increases both risks and mean returns in this sample. Hold-to-maturity accounting of portfolio value combined with long holding periods eliminates the majority of measured risk. Direct investments in private equity funds underperform a replicating strategy designed to passively mimic the key economic features of their investment process before adjustments for liquidity differences.
John. A. Paulson Professor of Business Administration
Erik Stafford joined the faculty at HBS in July 1999, where he has taught finance in the required and elective curricula of the MBA Program and in the CFA Investment Management Workshop.
Erik's research efforts focus on investment management, capital markets, and the financial system. Two of his papers have won annual prizes for research excellence. "Managerial Decisions and Long-Term Stock Price Performance," written with Mark Mitchell, won the Merton Miller Prize for the paper deemed most significant in the 2000 Journal of Business , and "Limited Arbitrage in Equity Markets," written with Mark Mitchell and Todd Pulvino, won the Smith-Breeden Prize for outstanding paper in the Journal of Finance.
Erik has an undergraduate degree in Finance and Economics from the University of Maryland and a Ph.D. in Finance from the University of Chicago's Graduate School of Business.
In addition to his work at Harvard, Erik is an advisor to SummerHaven Index Management. SummerHaven designs indexes based on academic and proprietary research.
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