Benchmarking of Danish Private Equity Funds

Natalie Dvinge Andersen & Ida Kjær Brinkmann-Hansen

Student thesis: Master thesis

Abstract

The main purpose of this assignment is to study the ability of the Danish private equity funds to develop their acquired portfolio companies, so they perform better than the matched non-privateequity companies. Private equity funds raise capital from investors, invest this capital in companies with potential, develop the companies, and sell the companies to new owners with profit, when they have grown and matured. This process comprises both the acquisition, the ownership period and the divestment; the focus in this assignment is the ability of the funds to develop the companies through the value-creating factors, which is why we have collected financial data for all the Danish portfolio companies, which is acquired in the period from 2012 to 2017, and for a matched reference group that is not owned by a private equity fund, which gives us two groups of data. For the benchmark of the two groups we use an extended version of the linear programming technique; Data Envelopment Analysis, DEA, which is called Range Adjusted Measure, RAM, since this gives the most valid results and at the same time can handle negative key performance indicators, KPI. Thereby we determine the efficient frontier, that contains all the most efficient companies for each of the groups, from where the efficiencies of the remaining companies are determined. The efficiencies are therefore used as a measure of performance, and contains information about all the chosen inputs and outputs. In this analysis, we use one dummy input and two KPIs as outputs; return of investment, ROI, and the liquidity ratio. The purpose of the benchmark analysis is to find out if private equity companies have better development opportunities than the non-private-equity companies, to which we use an indicator called Bilateral Productions Conditions, BPC. In this connection, it is concluded that the private equity funds have better development opportunities, which means that we must use group specific frontiers instead of a common frontier. This makes it relevant to use the indicator called Bilateral Industry Utilization, BIU, to compare the two groups’ utilization of their group specific development opportunities. Based on the empirical analysis, it is concluded that the non-private-equity companies are slightly better at exploiting their development opportunities than the private equity companies - but not significantly better. Since RAM is not very prevalent we have had to make some model extensions in relation to both the theoretical review and the analysis. Additionally, the indicators; BPC and BIU, are from an entirely new study from 2019 and have never been used together with the RAM model, which means that the focus in this assignment is to contribute something new in the field. The advantage of using these methods is that we can get a measure of the efficiency of the companies that contains information about all the chosen parameters, and thereby highlight other patterns and tendencies that is not possible with the typical theory of comparison of two groups within economy and finance. However, some of those theories are used in the end of the assignment to study if some private equity funds manage to develop their portfolio companies better than others, which is seen not to be the case.

EducationsMSc in Business Administration and Management Science, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2019
Number of pages149
SupervisorsMette Asmild