Operational Value Creation in Private Equity

Abstract

Ever since the first private equity transactions took place in the late 1970s, private equity as an asset class has received an increased amount of attention in financial literature. This seems to emerge from the fact that the realm of private equity has changed over the span of three private equity waves. Private equity firms no longer see themselves as financial investors relying on financial arbitrage. Rather they have taken an interventionist approach levering the full aspect of the private equity toolbox to increase the value of their portfolio companies through changes in operational performance. This thesis takes inspiration from existing literature and seeks to shed light on two aspects of operational performance in private equity owned portfolio companies. As such, the purpose of this thesis is (i) to investigate whether private equity owned portfolio companies manage to outperform their non-private equity owned peers regarding changes in operational performance, and (ii) to ascertain if specific pre-select performance factors influence the operational performance changes in these portfolio companies. Based on a thorough review of previous literature, this thesis develops a conceptual framework hypothesizing the factors that drive changes in operational performance. Subsequently, this framework is tested in an empirical setting on a sample of 241 Scandinavian private equity transactions between 2012 and 2017. Utilizing the strengths of OLS Regression, this thesis finds evidence that private equity owned portfolio companies outperform their non-private equity owned peers regarding operational performance changes in revenue, EBITDA and free cash flow. Further, this thesis concludes a positive effect on operational performance from post-transaction CEO change and negative effects from prior private equity- and family ownership. Contrary to existing literature, this thesis finds no evidence that factors relating to cross-border buyouts, industry focus or board involvement entail superior nor inferior changes in operational performance. The findings of this thesis see implications for three key stakeholders, the portfolio companies, the private equity firms, and the investors. It is argued that portfolio companies shall be aware that private equity firms in the current environment operate with ambitious growth targets. Next, private equity firms must evaluate the actual effectiveness of the chosen performance factors in relation to their specific investment profile. Finally, investors should ensure to evaluate private equity firms on their ability to leverage the argued benefits of active ownership.