Applying the Toolbox or Battling Inherent Predispositions? A Study of How Select Pre- and Post-transaction Governance/Ownership Factors Impact Post-transaction Operational Performance Changes in Private Equity Portfolio Companies

Abstrakt

Private equity has seen an increased amount of attention in financial literature in recent years. Levels of activity in the industry have seen notable increases. Alongside these developments in activity, the face of private equity and the ways in which private equity companies interact with their portfolio companies has seen new developments. No longer do private equity companies merely rely on operational and financial engineering to create value. Private equity companies have taken on a new role as active owners, realizing the importance of governance and parenting.

This thesis follows in the footsteps of previous studies in trying to ascertain what drives the heterogeneous post-transaction operational performance changes of private equity portfolio companies. In doing so, this thesis sets out to explore the impact of pre- and post-transaction governance/ownership factors, such as prior family ownership and board involvement, on post-transaction operational performance changes in portfolio companies. Thus, the thesis considers both concrete applications of private equity’s value creation levers, as well as inherent predispositions characterizing the acquired portfolio company and the acquiring private equity company. Based on a thorough literature review, a conceptual model is derived explaining how these factors are hypothesized to impact post-transaction performance changes.

The conceptual model is tested in an empirical setting using regression analysis and a hand-collected sample of 83 Danish transactions from the post-financial crisis era. The empirical analysis reveals evidence that portfolio companies acquired by domestic private equity companies see superior operating performance changes. Statistical evidence is also found for the notion that active governance, as proxied by high levels of board involvement, leads to superior performances changes. Weak statistical evidence, slightly outside accepted and conventional significance levels, is found for the notion that family companies see inferior performance changes, albeit contingent on no post-transaction CEO change taking place in these companies. Previous authors have found statistically significant relationships between performance changes and e.g. prior private equity ownership, CEO changes, and ownership by industry focused private equity companies. The analysis at hand does not corroborate these findings.

Based on past literature, the conceptual model, and the empirical findings, it is argued that private equity companies should consider the geographic reach of their investments and how they interact with portfolio companies. Further research is recommended within the realm of family companies as private equity investments and on how private equity companies engage in active ownership.