The Role of Financial Leverage in the Performance of Private Equity Real Estate Funds

Alcock, Jamie; Baum, Andrew; Colley, Nicholas; Steiner, Eva

doi:10.3905/jpm.2013.39.5.099

Cited by 31 publications

(3 citation statements)

References 13 publications

(14 reference statements)

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“…Financial leverage level adopted by various firms all over the world differs considerably (Gambacorta, Yang & Tsatsaronis, 2014). The relative importance of financial leverage as indicated by Alcock, Baum, Colley and Steiner (2018) of firms ranges from 20% in the United States to over 60% in Austria, Hungary and New Zealand. Firms can choose among many alternative financial leverages.…”

Section: Introductionmentioning

confidence: 99%

Financial Leverage and Market Return of Manufacturing Firms Listed at Nairobi Securities Exchange, Kenya

MORANG’A,

OTINGA, PhD,

MIROGA, PhD

2024

strategicjournals.com

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The study's objective was to establish the financial leverage effect on Market Returns of manufacturing companies listed at the Nairobi Securities Exchange. The study employed a descriptive design. The study targeted 8 listed manufacturing firms at the NSE. The sample size was 8 listed manufacturing firms listed at the NSE hence there was no sampling. Secondary data was collected for duration of 5 years (2018 to 2022) annually. In data analysis, both descriptive and inferential statistics was conducted. STATA 15 was employed for the data analysis purposes. The results were presented using charts, figures and tables as well as models. The results indicated that debt intensity level, interest obligation and asset tangibility have significant negative effect on market returns of listed manufacturing firms. However, equity structure has significant positive effect on market returns of listed manufacturing firms. The study concluded that financial leverage have mixed significant effect on market return of listed manufacturing firms at NSE. The study therefore recommended that firms should use debt financing especially when the funds would be used to increase asset utilization. That is, firms should only borrow funds if the funds would be used to increase utilization of existing assets. This study recommended that management of listed manufacturing firms should control the amount of interest expense since an increase in interest expense has an effect in that it reduces the market returns. A firm should aim at increasing shareholders wealth through increasing percentage of retained earnings as compared to percentage of dividends payout.

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Section: Introductionmentioning

confidence: 99%

Financial Leverage and Market Return of Manufacturing Firms Listed at Nairobi Securities Exchange, Kenya

MORANG’A,

OTINGA, PhD,

MIROGA, PhD

2024

strategicjournals.com

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“…Anson & Hudson-Wilson (2003) illustrate that leverage should be used with moderation in order to optimize performance relatively to risk. Case (2015) controls for investment style of U.S. funds and reports that leverage has such large negative effects during the few down market periods compared to the small positive effect during the up market periods that the impact is eventually negative (see also Alcock, Baum, Colley & Steiner, 2013, who additionally control for the corresponding real estate market with an international perspective). Investigating the impact of leverage over the long run, Baum, Fear & Colley (2011, 2012 also conclude that leverage has generally a negative impact on European fund returns.…”

Section: Literature Reviewmentioning

confidence: 99%

Risk Factors of U.S. Real Estate Investments

Hoesli¹,

Delfim²

2017

24th Annual European Real Estate Society Conference

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This research focuses on macroeconomic risk factors pertaining to the various types of real estate exposure, i.e. direct, listed and non-listed investments. We apply panel model techniques which make it possible to take advantage of both the cross-sectional and time series dimensions of our data. Much emphasis is placed on comparing sensitivities to risk factors across the types of real estate exposure. This is important in order to assess whether indirect (listed and non-listed) exposures react in the same way as direct investments to the macroeconomy and how well such investments replicate direct real estate behavior. The empirical analyses are conducted using U.S. data from 1984Q1 to 2016Q2. Allocations both by sector and geography are considered. For indirect exposures, we also control among other things for size and leverage. The various types of real estate exposure generally respond similarly to risk factors with GDP, money supply, construction costs, expected inflation, and expected economic activity positively impact returns, while the term and credit spreads, unemployment, and unexpected inflation negatively affect returns.

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“…Mori, Ooi, and Wong (2013) also present evidence that REITs time their capital structure changes in response to conditions in the capital markets. Alcock, Baum, Colley, and Steiner (2013) investigate the effect of leverage on private equity fund performance. They study a global sample of direct real estate funds, using a mea-sure of overall leverage, with the main focus being the effect on returns of changes in leverage incurred in anticipation of the future performance of the underlying real estate market.…”

Section: Related Literaturementioning

confidence: 99%

REIT Financing Choices: Preparation Matters

2016

Self Cite

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Sun, Titman, and Twite (2014) find that risky capital structure characteristics, such as high leverage, a high share of debt due in the near future and a high share of variable-rate debt, significantly reduce the cumulative total returns of US REITs over the 2007-2009 financial crisis. In this paper we show that preparing ahead of the crisis significantly improved the cumulative return over the crisis period even after controlling for the levels of the relevant capital structure characteristics at the start of the crisis. Specifically, we document that REITs which reduced leverage and increased maturity prior to the crisis fared better during the crisis. For instance, a one standard deviation reduction in leverage generated a five percent higher cumulative return during the crisis. We further find that US REITs with the highest capital structure risk (high leverage and short maturities) were more likely to prepare for the crisis ahead by reducing leverage and extending maturity. This effect is especially large for REITs with strong governance. We also document that none of our findings hold for European REITs. This suggests that since European firms did not experience or observe the levels of market excess that occurred in the US before the crisis, whether or not they prepared for the crisis had no impact on their returns during the crisis. (2014) find that risky capital structure characteristics, such as high leverage, a high share of debt due in the near future and a high share of variable-rate debt, significantly reduce the cumulative total returns of US REITs over the 2007-2009 financial crisis. In this paper we show that preparing ahead of the crisis significantly improved the cumulative return over the crisis period even after controlling for the levels of the relevant capital structure characteristics at the start of the crisis. Specifically, we document that REITs which reduced leverage and increased maturity prior to the crisis fared better during the crisis. For instance, a one standard deviation reduction in leverage generated a five percent higher cumulative return during the crisis. We further find that US REITs with the highest capital structure risk (high leverage and short maturities) were more likely to prepare for the crisis ahead by reducing leverage and extending maturity. This effect is especially large for REITs with strong governance. We also document that none of our findings hold for European REITs. This suggests that since European firms did not experience or observe the levels of market excess that occurred in the US before the crisis, whether or not they prepared for the crisis had no impact on their returns during the crisis. WORK IN PROGRESS -DO NOT CITE OR QUOTE WITHOUT PERMISSION

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The Role of Financial Leverage in the Performance of Private Equity Real Estate Funds

Cited by 31 publications

References 13 publications

Financial Leverage and Market Return of Manufacturing Firms Listed at Nairobi Securities Exchange, Kenya

Financial Leverage and Market Return of Manufacturing Firms Listed at Nairobi Securities Exchange, Kenya

Risk Factors of U.S. Real Estate Investments

REIT Financing Choices: Preparation Matters

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