Kapitalfondes operationelle værdiskabelse igennem en lavkonjunktur: En empirisk analyse af danske porteføljeselskabers rentabilitet i perioden 2006-2009

Bjørn Lund-Nielsen

Student thesis: Master thesis


The main objective of this master thesis is to analyze the operational performance of private equity owned companies during a recession. Numerous studies have been conducted on how private equity owned companies performs in general. But how does a recession influence the value creating tools that private equity companies use? From the theoretical discussion I find that two of the value creating tools that private equity firms use, active ownership and a focus on operational effectiveness, should be highly valuable in a downturn, as there will be a need for timely restructurings. The two other main tools, incentivizing of management and high levels of debt, are more difficult to conclude on. The high level of debt should be negative in a recession, because it increases the likelihood of bankruptcy. On the other hand, bankruptcy theories provide arguments for why private equity owned firms could be able to operate with higher debt without increasing the risk of bankruptcy. Through more stable cash flows and easier access to new equity, they could neutralize the effects of the higher debt. To test these theories I conduct an in depth empirical study of 34 Danish companies that have been private equity owned through the period 1st of June 2006 to 31st of December 2009, and therefore have experienced the full effect of the latest recession. As benchmark I use both a benchmark consisting of 48 companies that resembles the private equity owned firms on industry and size of assets, and a benchmark consisting of the relevant industry averages. The main conclusion from the analysis is that the private equity owned companies have had a superior development in profitability compared to the benchmarks. All three groups show an increase in profitability in 2007 by 10-20%, and a decrease in 2008 of around 30%. But in 2009 the profitability of the groups goes in different directions. The private equity owned companies increase their profitability to almost the same level as in 2006, while the benchmarks show a continued decrease of around 25%. The difference can be traced back to a superior reduction of costs for the private equity firms. They show to be much more efficient in changing management and doing restructurings quickly to adjust the cost level to the new tougher macro environment. The private equity firms have been able to achieve this without having more employee layoffs than the benchmarks. The private equity firms show a slightly superior working capital management and all groups show a significant increase in cash flow. I was not able to provide clear conclusions on the effect of gearing, number of private equity partners in the board of directors and length of ownership on profitability. Although the gearing is much higher for the private equity owned firms, the data confirms the theories that this doesn’t have to lead to a higher risk of bankruptcy. During the recession private equity companies have shown a big willingness to add new equity to their companies and withhold dividends when needed. This put together with the fact that they are better to increase profitability in a recession makes me conclude that private equity owned firms are not more exposed to bankruptcies than other companies. All in all the analysis shows that the private equity ownership model has advantages in creating operational value through a recession compared to other ownership models.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2010
Number of pages116