Value creation in private equity: How investors might spot high performing funds

Mark Johnston

Student thesis: Master thesis


The aim of this paper is to analyse value creation factors in private equity in Denmark at the investment level. Private equity in Denmark is highly influenced by international trends and has undergone changes towards a longer term value creation model through operational improvement and less focus on leverage and short term asset stripping. This paper includes a discussion of PE in general with emphasis on the strengths of the PE model, both in terms of attractiveness for investors and strengths in the underlying business model. Further, analysis of differences in returns for investors, management company and co-investors are provided. Through analysis of 112 private equity investments in Denmark, the author identifies all cash in- and outflow for each investment and calculates a return (IRR) for each investment. The sample shows great variation, with the median IRR being (7%) and the top quartile being above 31% and the bottom below (48%). At aggregated level, the fund return also shows great variation with the top quartile PE funds having above 36% IRR, median at (2%), and the bottom quartile below (19%). An important note is that the analysis excludes any management company costs The variation finding is in line with previous studies, which underlines the importance of investing in the right funds to maximise returns. The author finds four significant factors which combined explains 36% of the variation in IRR. These are: (i) Active ownership (partner involvement factor), Business plan development (ownership period and earnings growth factors) and market conditions (multiple arbitrage factor). The idea is that by identifying the funds which have created value through these four factors, the investor is able to invest in high performing funds and avoid low performing or funds affected by one-time-wonder investments. By introducing a simple model, the author found that the best PE funds in the sample most likely to continue to be successful based on the above four factors are 3i, Capidea, Nordic Capital, Altor and Jysk-fynsk Kapital.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2011
Number of pages213