Operational Value Creation in Nordic Private Equity

Abstract

Private equity as an asset class has garnered significant attention in economic and financial literature ever since the inception of the big corporate raiders in the 1980s. The heightened and continued interest appears to stem from the fact that private equity has evolved over the course of three distinct waves. As of today, private equity firms have adopted an interventionist approach, utilizing the full spectrum of the private equity toolbox to enhance the value of their portfolio companies, thus moving away from being seen as financial investors relying solely on financial arbitrage and gearing.

This thesis draws inspiration from existing literature and aims to explore two important aspects of operational performance in private equity owned portfolio companies. Namely, (1) whether Nordic private equity owned portfolio companies achieve supernormal operational performance relative to their non-private equity owned peers, and (2) to what extent certain performance indicators related to active ownership and pre-transaction characteristics can explain a potential difference.

Upon a thorough literature review, this thesis developed a conceptual model that was empirically tested using OLS regression on a sample of 220 Nordic private equity transactions that occurred between 2012 and 2018. The results of this thesis revealed that private equity owned portfolio companies outperformed their non-private equity owned peers in terms of supernormal operational performance in revenue and EBITDA. Moreover, this thesis found that industry specialization and the execution of a buy and build strategy within portfolio companies have a significant positive impact on supernormal operational performance changes while secondary transactions have a significant negative impact. In contrast to prior literature, this thesis does not find any significant evidence that active interventions, such as board presence and CEO changes, have an impact on achieving supernormal operational performance.

The implications of these findings extend to several stakeholders within the private equity ecosystem, including portfolio companies, private equity firms, investors, and the government. Portfolio companies should be cognizant that their owners are inclined towards inorganic growth strategies that necessitate an adaptive change approach. Private equity firms should consider specializing within specific industries to differentiate themselves in a fierce market. Investors, in turn, should evaluate private equity firms based on their ability to leverage the benefits of active ownership which is a crucial factor in the current landscape. Finally, policymakers and government entities must ensure that app3ropriate regulatory frameworks are in place to maximize the potential benefits private equity ownership brings.