Empirical Analysis of Private Equity Funds Operational Value Creation in Danish Portfolio Companies: With Focus on the Learning Curve and Change in Management

Mads Gjellerup Thomassen & Michael Stevns Madsen

Student thesis: Master thesis

Abstract

The main purpose of this master thesis is to analyse the operational performance of Danish private equity owned companies with a special focus on the learning curve effect and the effect of replacement of the executive board and the board of directors. Through an examination of which value creating tools private equity funds have in their toolbox, it is found that they primarily use optimisation of capital structure, timing of acquisition/exit of portfolio companies and operational improvements. Previously, capital structure optimisations were private equity funds most important value creating tool, but within the last decade, operational improvements have become ever more important. As private equity funds repeatedly buy and sell companies, it is possible that they are experiencing a learning curve. Furthermore, private equity funds often replace the executive board and the board of directors in their portfolio companies to achieve control and to be able to monitor the company. Based on this it is analysed whether: private equity funds create operational value compared to other companies? They experience a learning curve? The replacements of management have a effect on the operational improvements? To test these three statements, a dataset consisting of 48 Danish private equity owned companies and 65 carefully selected Danish comparable companies is constructed. To be able to test the learning curve effect, the dataset consists of three large Danish private equity funds, Axcel, Polaris and Maj Invest, with a long history and at least three fully invested funds is used. The main conclusion of the analysis is that private equity owned companies create operational value compared to the reference group in terms of EBITDA, which is primarily driven by cost savings resulting in an improved EBITDA-margin. Furthermore, the private equity owned companies show improved profitability in terms of EBITDA/Invested capital and ROIC. The three private equity funds become significantly better at improving profitability measured as EBITDA/Invested capital and ROIC, the more experience they get. Moreover, replacements in the executive board have a significant effect on the improvement in EBITDA, while both replacements of board of directors and executive board have a significant effect on the profitability measured as EBITDA/Invested capital and ROIC. No significant results in terms of working capital and cash flow were found. With these results in mind, it is concluded that private equity funds create operational value, that they experience a learning curve effect and that operational performance can be improved by replacing the executive board and the board of directors.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages150