Private Equity Firms Ability to Generate Value in an Economic Downturn: An Empirical Study of Danish Portfolio Companies’ Profitability in a Recession

Adil Iqbal & Haider Anjum

Student thesis: Master thesis


The main objective of this thesis was to investigate the profitability and value creation of Danish companies under private equity ownership. Furthermore, we investigate to what extent the methods applied by the private equity firms affects the bankruptcy risk of their portfolio companies. There have been conducted several studies on how PE-funds perform in general but few of those relate to the performance of their specific portfolio companies. Furthermore, this thesis conducts its analysis with a specific macroeconomic period in mind, namely the recession, thereby contributing to the literature with a new and interesting aspect. Recent years have seen a significant increase in private equity activity in Denmark with both small and major Danish companies being acquired by various private equity firms. The increasing activity has drawn massive attention from the Danish media and public with the PE-firms being portrayed as greedy and value creating for only themselves. PE-firms apply several value-creating tools in their pursuit of high returns. Our analysis will be based on a comparison between the portfolio companies and a reference group. The investigation will be based on three different analysis; a profitability analysis, an EVA analysis and an analysis on the risk of bankruptcy. We find that in a recession specially two of the value creating tools are of high value, namely active ownership and operational improvements. The recession and its impact on the companies required fast decision making which the PE-firms exerted through active ownership. Furthermore, an economic downturn demands for timely operational efficiency improvements. Our analysis revealed that the profitability of the portfolio companies during the recession outperformed the reference group on the majority of the profitability measures. The EVA analysis revealed that the reference group averaged a higher EVA-value if measured over the entire period. However, the portfolio companies performed slightly better in 2010 indicating the PE-firms’ ability to guide companies through economic downturn periods. Furthermore, the EVA-analysis revealed that the foreign PE-firms are performing better than their Danish counterparts. Lastly, the bankruptcy risk revealed that the portfolio companies operated with greater bankruptcy risk, however as the PE-firms are willing to add additional capital if needed their bankruptcy risk is mitigated.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2018
Number of pages125