Value Creation under Private Equity Ownership: A Survey among Danish Portfolio Companies

Abstrakt

The objective of this thesis is to determine drivers of value creation under private equity ownership by gaining an understanding of the theoretical tools private equity firms use to create return on their investments and comparing them with an empirical examination among Chief Executive Officers (CEOs) in Danish private equity owned companies. The thesis takes a qualitative approach in determining value creation under private equity ownership and a questionnaire is therefore designed and targeted CEOs in Danish companies acquired by a private equity fund during the period 2004-2007, requesting the managers to rate the relative importance of theoretical levers for value creation in their companies while under private equity ownership. The results show that corporate governance under private equity ownership lowers the agency costs as the incentive packages offered solves the principal-agency problems related to moral hazard, though there is a downside to the strong incentives if they come at a cost for unincentivized tasks. Financial engineering in terms of designing optimal capital structures has in contrast to expectations a negative impact on value creation. Hence, the capital structure may not have been optimal in the light of the financial crisis and the following slow-down in the economy. Consistent with theory, lowering the costs of free cash flow available for spending at the discretion of management through optimization of free cash flow and capital expenditures have a positive impact on value creation. Active ownership and operational partner has a negative impact most likely because fund managers spent relatively more time on the low performing companies within their portfolio. There is a tendency that these areas are influenced by a psychological bias as the CEOs feel responsible for operational initiatives if they prove to be successful and on the other hand put more of the responsibility on the fund when the results are not achieved. A holding period of 5 years is found to maximize the value as years of ownership has a positive influence up until this point. The relative importance measures of the value drivers indicate that it is the combination of the value drivers which are important in value creation and the combined effects of the private equity model from a social perspective are beneficial if direct value creation up weights potentially negative externalities of redistribution.