Private Equity Buyouts: A Vehicle to Foster Growth: A Study of the Impact of Buyouts on Companies’ Operating Performance and the Effects of Parenting

Nadia Aagaard

Student thesis: Master thesis

Abstract

This paper studies the impact of private equity buyouts on the operating performance of buyout companies, using a sample of 61 buyouts of Swedish companies completed between 2008 and 2012, relative to a control group of non-buyouts. Evidence is provided on two dimensions of operating performance: i) Profitability and ii) growth. The results indicate that buyout companies do not improve profitability in the post-buyout period, but grow faster and increase investments considerably more than their peers. This paper then explores how private equity firms create value through parenting, by providing evidence consistent with the hypothesis that private equity firms alleviate buyout companies’ resource constraints, which allows buyout companies to seize unexploited growth opportunities, and subsequently fosters growth. Firstly, post-buyout growth is concentrated among companies that are more likely to suffer from pre-buyout resource constraints. Secondly, there is a clear pattern that buyouts of resource-constrained companies lead to significant increases in corporate investments. Further, the results indicate that private equity resources such as skills, experience and network are more important than financial resources for value creation. Overall, the findings of this paper indicate that buyouts are a vehicle to foster growth rather than to improve profitability, as previous studies indicate. In addition, the findings of this paper highlight the importance of parenting effects, as well as the human and social capital factors of private equity firms, for value creation in private equity buyouts.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2016
Number of pages65
SupervisorsAleksandra Gregoric