An exploration of tools of analysis commonly used by private equity in making investment decision

2.4. SUMMARY OF ACADEMIC OVERVIEW OF METHODS OF INVESTMENT ASSESSMENT USED BY PRIVATE EQUITY

Before leaving this chapter, it is useful to summarise the main tools commonly used by private equity analysts in making investment decisions, as noted from the literature review.

First, it should be highlighted that there does not appear to be any previous research on this topic per se in the United Kingdom, and even abroad. Necessarily therefore, some resort to general knowledge is called for. There is a widespread agreement among scholars on the meaning of the concept of private equity. Indeed, private equity is widely defined as equity «that is not publicly traded and that is used to finance business start-ups, leveraged buyouts, etc.» (Brealey, Myers and Allen, 2008, p. G-10; Wood and Wright, 2009, p. 361).

Secondly, investment decision or «capital expenditure» is the «selection of investment projects» (Arnold, 2008, p. 50). Financing decisions, as opposed to Investment decisions, are however not within the scope of this piece of research.

Thirdly, there are many techniques used by private equity specialists in making investment decisions. We weigh up to gather them together this way: traditional and recent tools. Concerning classic tools, academics such as Arnold ( 2008, p. 50); Chandra (2008, p. 116) and Vernimmen et al., (2009, p. 289) used the sacrosanct principle of time value of money in order to distinguish discounted cash flows from non-discounted cash flow tools. The former encompasses the Net present Value (NPV) and its prime competitor, that is the Internal rate of return (IRR) techniques whereas the latter alludes to the payback period, the profitability index and the accounting or book rate of return.

Relating to the recent methods of evaluation of investment proposal, they consist of real options. Created by Myers (1977), real options have steadily been on focus in the scholars community, reaching a peak of interest of both academics and practitioners in the early years of this 21^st century as put forward by Borison (2005, p. 17). Because investment decision is far from being, shall we say, a sort of a «noli-me-tangere» issue, the flexibility gained from real options makes a feature of this method. Real options are the possibility to «modify, postpone, expand, or abandon a project» (Brealey, Myers and Allen, 2008, p. G-11). Nevertheless, Vernimmen et al. (2009) described the opposite of real options as «hidden options» (Vernimmen et al. 2009, p. 374).

CHAPTER III RESEARCH METHODOLOGY

This chapter intends to answer the following concerns by turns: what does the concept research means? What is research methodology? What does research strategy mean? What is the signification of the concept of research design? What does the notion of data collection methods express and what is the approach adopted for this work?

3.1. WHAT IS RESEARCH?

In order to comprehend this concept, it would be worth starting with its negative meaning, in other words, what research is not, or to be more specific, the wrong meaning of that word. In accordance with this view, Walliman (2005, p.8) listed four erroneous senses of «research». First, to him a simple collection of facts or information is nothing but an «important part of the research». Secondly, according to him, «moving facts from one situation to another» regardless of interpretation is far away from being the whole research; it is merely an additional element of research. Thirdly, he further suggested that research is not an «esoteric activity, far removed from practical life»; it is an exploration of the universe, arisen from the strong desire to explain it instead. Fourthly, research is not a term to «get your produce noticed»; put it another way, in this case, research is only a result of a seat-of-the-pants activity.

Probably, the wrong sense of the concept of research has also something to do with its daily use in such a way that it turns out to be a virtually commonplace. In fact, there is a sort of ubiquity of the word «research», since it can be found in the newspapers, on television or radio throughout wide range of phrases, such as the «findings of market research companies' surveys», research as support of political decisions, and «results of research» in the field of advertisement, (Saunders, Lewis and Thornhill, 2007, p. 4). For clearing up the notion of research, we should now turn to its proper meaning, or positive sense.

For that purpose, Walliman (2005) have put forward three distinctive features of the concept research, videlicet a systematic data collection, a systematic data interpretation, and an unambiguous aim, that is «to find things out». Research therefore means «something that people undertake in order to find things in a systematic way, thereby increasing their knowledge» (Walliman, 2005, p. 5). The concept of «research» can also be defined as a «methodical investigation into a subject in order to discover facts, to establish or revise a theory, or to develop a plan of action based on the facts discovered» ( http://encarta.m00sn.com/encnet/features/dictionary/dictionaryhome.aspx.). In a more concise form, Kumar (2008) argued «the search for knowledge through objective and systematic method of finding solution to a problem is research» (Kumar, 2008, p. 2).

Having defined what research is it seems now more suitable to examine the concept of research methodology.

3.2. WHAT IS RESEARCH METHODOLOGY?

To provide an answer to the above question, we might need to gather first the word methodology per se. In this respect, the term methodology means «the system of methods followed in a particular discipline» ( http://www.elook.org/dictionary/methodology.html), or «the study of methods of research» (http : //encarta.msn.com/encnet/features/dictionary/dictionaryhome.aspx).

This couple of meaning of the concept methodology only dwell upon the word method. However, this view of the notion of methodology merely tends to reduce that concept to one of its components. In fact, the scope of methodology is wider and more inclusive than that as explained infra.

Concerning the phrase «methods of research», it is devised as all the techniques that «are used by the researcher during the course of studying his research problem» (Kumar, 2008, p. 4). Those techniques could be formed into three groups as Kumar (2008, p. 4) suggested:

- the first group encompasses data collection methods. They enable the researcher facing with insufficient availability of data to get answers that he is after.

- the second set of methods is made up of statistical tools that help relating data to unknown.

- the third category is concerned with the techniques of assessing the exactitude of results.

With respect to the expression research methodology, it refers to the «theory of how research should be undertaken, including the theoretical and philosophical assumptions upon which research is based and the implications of these for the method or methods adopted» (Saunders, Lewis and Thornhill, 2007, p. 602). Once again, research methodology could be viewed as the whole lot whereas research methods are just components of that entirety. Therefore, as Kumar (2008) concluded «when we talk of research methodology, we not only talk of the research methods but also, consider the logic behind the methods we use in the context of our research study and explain why we are using a particular method or technique and why we are not using others so that research results are capable of being evaluated either by the researcher himself or by others» (Kumar, 2008, p. 5).

Having highlighted that, research methodology does obviously raise the following three overriding concerns such as:

- Research philosophy or strategy

- Research Designs and

- Data collection methods.

Any single aforementioned issue is worth expounding by turns.

3.3. WHAT IS RESEARCH PHILOSOPHY OR STRATEGY?

To start with, a terminological precision needs to be stressed. It is about research philosophy and research strategy. Some academics make use of the first to allude to the second actually. For instance, Saunders, Lewis and Thornhill (2007, p. 102), regarding what they named «research onion», they argued that research philosophy, located in the first layer from the surface, includes the following sets of idea: positivism, realism, objectivism, subjectivism, interpretivism, pragmatism, radical humanist, radical structuralist, functionalist, and interpretative. However, to their viewpoint, research strategy encompasses experiment, survey, case study, action research, grounded theory, ethnography, and archival research. Nonetheless, to others the first group constitutes research strategy whilst the second should be called research design (Bennison, 2006).

As a matter of fact, what precedes does give an account of just a difference of terminology, because when it comes to look at the components of each concept, we could easily conclude that they are alike. In any case, throughout this paper we should refer to the concept of research strategy to allude to research philosophy. Notwithstanding, when it will come to talk about what Saunders, Lewis and Thornhill (2007, p. 102) named research strategies, we should refer to as research design instead in order to avoid being muddled.

Having noted that, it should be stated that research strategy rests on the idea that it determines the basic philosophy whereby a subject could be approached. There are a number of abstract concepts that form research strategy as said supra, but we will only examine three out of the list, namely axiology, epistemology, and ontology.