Based on research by Alexander Butler, Larry Fauver and Ioannis Spyridopoulos

• IPOs have a positive spillover effect on the local economy in which a company is headquartered.
• After an IPO, zip codes close to a company’s headquarters see certain home prices and consumer spending rise, while more new businesses and jobs are created.
• The positive effect comes from the change in listing status, not from capital raising.

A massive company announces plans to bring its headquarters to town, and the locals can’t stop grumbling. The added traffic. The noise. The shifts in neighborhood routine as a giant new facility gets up and running.

Then the company files for an IPO.

Over the next two years, the traffic and dust may well be forgotten as residents watch their local economy transform. Anecdotal evidence suggests that the mere change in a company’s listing status, along with the liquidity it brings its shareholders, can significantly influence local economies.

That was certainly the case with Facebook in 2012, when CEO Mark Zuckerberg helped create a thousand new millionaires and a dozen new billionaires. In the six months following Facebook’s IPO, the newly rich drove up real estate prices in the San Francisco Bay area by more than 15 percent as their previously illiquid stock wealth became liquid. Two and a half decades earlier, Dell’s 1988 IPO created “Dellionaires” who got rich off their shareholdings and promptly moved into McMansions in the Austin area, forever changing the city.

But were these spillover effects isolated incidents — or the norm? In a recent study, Rice Business professor Alexander W. Butler set out quantify the impact of spillover effects on local economies.

Collaborating with Larry Fauver of the University of Tennessee and Ioannis Spyridopoulos of American University, Butler found that Facebook’s and Dell’s impacts were not one-offs: IPOs typically spark significant positive spillovers in local economies. What’s more, the team determined that it is the listing decision, rather than actual capital raising, that boosts local labor markets, business environments, consumer spending and real estate.

But why? An IPO doesn’t create a new company. It does, however, generate significant liquidity for the firm, for employees and for other shareholders who go forth into the community to spend their new cash. Investors’ wealth also rises if a firm’s stock price climbs after listing, as does a firm’s wealth as it raises new capital.

To be certain that it’s not just a firm’s raising of capital that causes these spillovers, Butler and his team also looked at the effects of seasoned equity offering (SEO) activity, which doesn’t involve a change in a company’s listing status. What they found is that the effect of SEOs on local economies is insignificant. So capital raising alone is not enough.

To reach their conclusions, Butler and his colleagues selected 1,365 zip codes that had at least one IPO between 1998 and 2015. (The years 1999, 2000 and 2003 were excluded due to a lack of income data at the zip code level.) They also identified zip codes that were two miles, five miles and ten miles from a newly public company’s headquarters.

Then they compared their selected zip codes to control zip codes in the same county using a matching process to compare “apples to apples.” The team compared figures such as changes in home prices, the number of new mortgages, zip code business patterns, credit card spending, and income and wages for the two years following an IPO.

Analyzing these data, they found that when an IPO occurs, each $10 million in proceeds leads to an extra 0.7 new businesses in the surrounding area and 41 new local jobs. And while the price of expensive homes in the newly public company’s zip code didn't increase, the prices of expensive homes in other zip codes within two miles of headquarters did rise — by $3,900 for the average expensive home valued at $590,000.

Prices were also higher in zip codes two to five miles away from headquarters, but less so. Growth of home prices, they discovered, gets a boost after the lockup period ends and shareholders can sell their stock, supporting the hypothesis that changes in investor liquidity cause that spillover. Further evidence of this came when they found that home prices climb even more when a firm’s stock price jumps after the IPO.

But IPOs are not all good news for communities. Findings also showed IPO activity increases the odds that middle- to lower-income residents may have to move to lower-income zip codes. In the years following Facebook’s IPO, workers in the Bay area such as police officers, teachers and firefighters were priced out of the housing market and relegated to long commutes to work.

Facebook has taken notice. The Chan Zuckerberg Initiative, a charitable foundation Zuckerberg cofounded with his wife, Priscilla Chan, has donated $3.6 million toward the city’s housing crisis.

As future companies go public, leaders could be well served to recognize Butler’s team’s findings. Yes, when their firm gains better access to financial markets, they’re really are helping lift up the local economy — just not everyone who’s living in it.

Alexander W. Butler is a professor of finance at Jones Graduate School of Business at Rice University.

To learn more, please see: Butler, A.W., Fauver, L., & Spyridopoulos, I. (2019). Local economic spillover effects of stock market listings. Journal of Financial and Quantitative Analysis, 1-56.

Based on research by Robert E. Hoskisson (George R. Brown Emeritus Professor of Management), Wei Shi, Xiwei Yi and Jing Jin

• More and more private equity (PE) firms are differentiating themselves in terms of financial structure and scope of their portfolios.
• These different strategic positions have important implications for managers, investors and banks.
• Policymakers, too, need to understand the benefits and disadvantages of different types of PE firms.

In recent years, private equity (PE) firms have grappled with dwindling sources of inexpensive debt, shrinking credit — and withering criticism from the public. To compete for high-value investors and remain buoyant in this new environment, PE firms are now pursuing a range of new strategies.

Rice Business emeritus professor Robert Hoskisson joined former students Wei Shi, Xiwei Yi and Jing Jin to review the current literature and theory about today’s private equity firms. PE firms, they found, can be now be grouped into different categories based on their strategies. Understanding how these categories differ, the researchers concluded, can help investors, banks, policymakers and PE managers all make better decisions.

To analyze the different PE firm strategy types, Hoskisson and his colleagues developed a quadrant showing each PE firm’s use of debt over equity, and whether it operates niche or diversified portfolios.

While all the firms offer industry expertise and specialized knowledge and capabilities, firms that emphasize debt — such as Bain Capital — provide certain perks regarding investor-manager alignment. Known as “short-term efficiency niche players,” these firms are under more pressure to make interest payments. They also offer investors the benefit of tax deductions on that interest. Niche players with long-term equity positions — such as SCF Partners — prioritize offering long-term equity capital (instead of debt) to fund the PE firms’ portfolio of companies. Niche players also offer consistent professional support and periodic injections of cash to reinforce growth plans for their acquired businesses.

The researchers also analyzed a different set of PE firms known as “diversified players.” These firms prioritize equity and keep their portfolios focused on a limited number of industries as a way to limit bankruptcy risks in volatile markets. When one such firm, Apax, took over the UK retailer New Look in 2003, for example, it focused on internationalization and higher performance. Four years later, the firm chose not to sell, despite a bull IPO market.

The scholars also examined a subset of these diversified players, one that that relies on debt investments to make investments in multiple projects at the same time. Such firms normally try to divest the companies in their portfolio as quickly as possible. Typically large in size — KKR and Blackstone are two examples — these do not have the same degree of specialized experience as the likes of Apax. A team of experts from KKR known as KKR Capstone, for instance, offers the services of general management professionals to the companies they acquire, which helps prepare them to turn around the companies and sell them off. This kind of on-site support helps the portfolio companies make whatever changes are needed to get returns as soon as possible.

Exploring these differences in positioning, Hoskisson and his colleagues write, sheds new light onto the type of strategies an ambitious PE firm can adopt to create value. Globalization and deal syndication deals are especially promising strategies, they note, as long as companies careful think through the rationales of each option. Institutional investors and banks that lend to PE firms should understand the differences in strategic orientation too. Long-term investors, such as pension funds, might want PE players with long-term orientations such as Apax and SCF Partners. Alternatively, banks — which hope to lend to short-term efficiency niche players — need to consider the risks linked to fast turnarounds.

Policymakers, too, can learn from the researchers’ four quadrants. As the public grows increasingly hostile to private equity — focusing particular wrath on leveraged buyouts — governments need to be much more thorough in vetting the advantages and disadvantages of different types of PE firms. The strong public association of high leverage and overall market risk — the kind of risk that entails the total collapse of a system or market — means that policymakers are under public pressure to control the PE space.

At the same time, reflexively enacting overly restrictive regulation can be a mistake too, Hoskisson and his team warn. Instead of one-size-fits all regulation, the researchers advise, policymakers — as well as managers, banks and institutional investors — need to understand and address the strategic diversity among general partner PE firms. Looking at the grid can help sort out the options.

Robert E. Hoskisson is the George R. Brown Emeritus Professor of Management at Jones Graduate School of Business at Rice University.

To learn more, please see: Hoskisson, R. E., Shi, W., Yi, X., & Jin, J. (2013). The evolution and strategic positioning of private equity firms. Academy of Management Perspectives, 27, 22-38.

Record $2.9 million awarded at world’s richest, largest student startup competition

Vita Inclinata Technologies from Mitchell Hamline School of Law in St. Paul, Minnesota, emerged as the top startup company Saturday in the 2019 Rice Business Plan Competition (RBPC) hosted by the Rice Alliance for Technology and Entrepreneurship and Rice’s Jones Graduate School of Business. The annual event is the world’s richest and largest student startup competition, and this year’s award total was a record $2.9 million.

Selected by 300 judges from the investment sector as representing the best investment opportunity and taking home nearly $700,000 in cash and prizes, Vita bested 41 other competitors hailing from some of the world’s top universities. Vita is a startup developing critical technology for sling-load and rescue helicopter operations. Vita’s goal is to eliminate the potentially deadly swing of suspended loads.

Significant new prizes this year and the teams that won them include:

* $350,000 GOOSE Society Investment Grand Prize – Vita Inclinata Technologies, Mitchell Hamline School of Law.

* $200,000 OWL Investment Group Prize – Zilper Trenchless, Massachusetts Institute of Technology.

* $200,000 OWL Investment Group Prize – Vita Inclinata Technologies, Mitchell Hamline School of Law.

* $300,000 GOOSE Society Investment Prize – Resonado, University of Notre Dame.

* $200,000 GOOSE Society Investment Prize – Rhaeos, Northwestern University.

* $200,000 GOOSE Society Investment Prize – spotLESS Materials, Penn State University.

* $125,000 GOOSE Society Investment Prize – CataLight, University of Waterloo.

* $100,000 GOOSE Society Investment Prize – BrewBike, Northwestern University and University of Chicago.

* $125,000 Finger Interests, Anderson Family Fund, Greg Novak & Tracy Druce Second-Place Investment Prize – Resonado, University of Notre Dame.

* $100,000 Cisco Global Problem Solver Prize – Rhaeos, Northwestern University.

* $100,000 TiE Houston Angel Group Investment Prize – spotLESS Materials, Penn State University.

* $125,000 Houston Angel Network Investment Prize – Zilper Trenchless, Massachusetts Institute of Technology.

* $100,000 The Artemis Fund Investment Prize – Zilper Trenchless, Massachusetts Institute of Technology.

* $100,000 The HALO Fund Investment Prize – Rhaeos, Northwestern University.

* $75,000 NASA Space Exploration Innovation Cash Award(s) – NABACO, Texas State University.

* $25,000 Southwest National Pediatric Device Prize – MiVUE, UCLA.

* $25,000 Southwest National Pediatric Device Price – Rhaeos, Northwestern University.

* $15,000 Women’s Health and Wellness Prize – Embryonic, University of California, Irvine.

* $15,000 Women’s Health and Wellness Prize – CataLight, University of Waterloo.

* $50,000 Courageous Women Entrepreneurs Prize – spotLESS Materials, Penn State University.

* $10,000 Courageous Women Entrepreneurs Prize – Treyetech, Johns Hopkins University.

* $25,000 Texas Business Hall of Fame Best of Texas Prize – NABACO, Texas State University.

* $25,000 TMCx Life Science Accelerator Prize – Rhaeos, Northwestern University.

* $25,000 Pearland Economic Development Spirit of Entrepreneurship Prize – LilySpec, Rice University.

* $20,000 JLABS@TMC Life Science Startup Prize – Treyetech, Johns Hopkins University.

* $20,000 OFW Law FDA Regulatory Strategy Prize – Calcium Solutions, University of Michigan.

* $15,000 Polsinelli Tech Investment Prize – Vita Inclinata Technologies, Mitchell Hamline School of Law.

* $15,000 Polsinelli Energy Technology Investment Prize – Vita Inclinata Technologies, Mitchell Hamline School of Law.

* $10,000 The Eagle Investors Prize – Zilper Trenchless, Massachusetts Institute of Technology.

* $10,000 Poorna Uppala – Women Empowerment Prize – spotLESS Materials, Penn State University.

* $10,000 Insperity Startup Culture Prize – Formally, Brown University.

* $6,500 Edward H. Molter Memorial Prize for Top Wildcard Team – BrewBike, Northwestern University and University of Chicago.

* $3,000 Palo Alto Software Best LivePitch Prize – RagnaRock Geo, Norwegian University of Science and Technology.

* $3,000 Jones Partners “The Connector” Prize – Tutorfly, UCLA.

* $1,000 Mercury Fund – LilySpec, Rice University.

* $1,000 Orrick Awards Banquet Company Showcase Prize – LilySpec, Rice University.

Symphony from the University of Mumbai won the $5,000 online People’s Choice Competition sponsored by Accenture. The winner was determined by a record-setting 22,000 people who voted for their favorite team via a Facebook poll.

The prizes were presented Saturday night at a banquet at the Westin Galleria that concluded the three-day event, which began April 4.

This year’s competitors were among the most diverse in the history of the competition and came from top universities around the globe, according to Brad Burke, managing director of the Rice Alliance. The teams were chosen from more than 300 entrants to compete in four categories: life sciences, information technology/web/mobile, energy/clean technology/sustainability and tech innovation. Each team made its case in 15-minute investment pitches and a rapid-fire 60-second elevator-pitch contest on the first night of the competition.

The seven finalists based on the judges’ overall scores in the 2019 RBPC were:

Vita Inclinata Technologies, Mitchell Hamline School of Law — grand prize and individual prizes with a total value of nearly $700,000. 

The grand prize includes:

• $350,000-plus Investment Prize from The GOOSE Society of Texas. 
• Treasury services provided by Bank of America ($5,000).
• Business plan software provided by Palo Alto Software.
• Opportunity to ring the closing bell at the NASDAQ Stock Market in New York.

Resonado, University of Notre Dame — $125,000 second-place prize and a total of more than $300,000 in prizes.
Resonado’s goal is to redefine the shape of sound with its patented Flat Core Speaker Technology.

spotLESS Materials, Penn State University — third place and more than $360,000 in total prizes.

spotLESS Materials is developing a robust bio-inspired, liquid-, sludge- and bacteria-repellent coating that can be applied in minutes in ambient conditions.

Rhaeos, Northwestern University — fourth place and more than $450,000 in total prizes.

Rhaeos is a wireless, wearable flow sensor designed to revolutionize the management of neurosurgical patients with hydrocephalus.

Zilper Trenchless, Massachusetts Institute of Technology — fifth place and more than $435,000 in total prizes.

Zilper Trenchless is working to significantly reduce the cost of infrastructure by developing new technologies related to water pipeline construction.

BrewBike, Northwestern University and University of Chicago — sixth place and more than $100,000 in total prizes.

BrewBike is working to provide college communities with delicious coffee in the most convenient ways.

CataLight, University of Waterloo — seventh place and more than $140,000 in individual prizes.

CataLight is a new kind of water filter with the goal of giving families in developing communities safe drinking water.

The top seven finalists will also receive:

• Station Houston Engine of Innovation Prize
• The Cannon Work Space Prize
• WeWork Work Space Prize

More than 140 corporate and private sponsors support the business plan competition.

Since the RBPC’s inception in 2001, when nine teams competed for $10,000, more than 229 competitors have gone on to successfully launch their ventures and are still in business today or have successfully sold their ventures. Past competitors have raised nearly $2.3 billion in funding and created more than 3,000 new jobs.

For more information about the RBPC, visit www.rbpc.rice.edu.