Private equity funds: Is the business model viable in the future?

Jacob Pedersen & Michael Arup

Studenteropgave: Kandidatafhandlinger


The purpose of this thesis is to look at what the private equity ownership entails and what changes the funds implement in their portfolio companies in order for these to achieve the returns that private equity funds have produced historically. The analysis of the business model of the funds was motivated by the fact that the historically primary element of the funds; the financial, is under pressure. Increasing tax legislation has removed the majority of the tax shield that the funds have benefitted from earlier, and furthermore the current financial situation has frozen the financial markets and thereby eliminated or at least decreased the possibility of gearing the portfolio companies. We therefore wanted to look into the other value creating elements of the business model that has to be emphasized now. We decided to analyze four pillars of the business model, which we believe are the most important; Financial, Governance, Operational and Strategic Engineering. The analysis was built on an already exited case and an ongoing case, DT Group and ISS respectively. This was done in order to capture the effect of the timing issue, while the number of cases was held to a minimum to ensure that the case study was able to go into depth with the engineering used in the two cases. Through the in-depth case study we have found that the changes implemented were of a relatively large significance. This was especially the case within the governance engineering where great changes were implemented for both companies. Nevertheless based on calculations from the CAPM formula, ISS underperforms compared to the market when the leverage is taken into account. However both companies have experienced enormous growth both in turnover and employees, and the development have been accelerated after the takeovers. The analysis of the business model of the private equity funds was combined with an outlook into the likely developments that will influence and change the business environment that the private equity firms operate in. This covers both some of the future business opportunities, as well as discussing some of the many challenges that the private equity sector are facing. It is essential that the private equity firms manage to adapt to changes in the business environment, in order for the business model to be viable in the future.

UddannelserCand.merc.fsm Finance and Strategic Management, (Kandidatuddannelse) Afsluttende afhandling
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