Private Equity in a Corporate Governance Perspective

Claude Jeppesen

Student thesis: Master thesis

Abstract

The main object of this master thesis is to determine and analyze how private equity create value in their portfolio companies through corporate governance mechanisms and to analyze the possible weaknesses in their business model. Based on corporate governance theories, the existing empirical evidence will be illustrated, analyzed and compared. Corporate governance is a secondary value driver and its impact on value creation is indirect. This thesis takes a qualitative approach and analyzes the stated drivers behind the value creation in the portfolio companies. Theories such as; the principal–agent problem, governance through active and concentrated ownership, and the board structure will be analyzed. In addition, the impact of using relatively high debt to discipline the management and the use of incentive pay will be studied.
The results of the analyzed research are not always straightforward, some of the results are consistent with the existing theory, and others are not. The literature review concludes that the private equity have fewer principal-agent problems due to the combination of higher debt, monitoring and incentive pay. Evidence shows that there is a positive relationship between incentives and the company performance. A research from McKinsey concludes that the background of the business partners have an impact on performance. Another survey from Denmark states that the value creation comes from active and concentrated ownership and not from a contribution from the knowledge nor experience from the private equity.
Theories and several researches indicate that the heterogenic board structure is an important factor to business value creation. By analyzing the board structure of 32 Danish portfolio companies and 3 Danish private equity management teams the conclusion is that heterogeneity might be neglected and can be an alternative source to value creation. The business model might also have some weaknesses seen from a strategic and stakeholder perspective. Using corporate governance mechanism such as debt, concentrated ownership, and incentive pay have many advantages but there are also drawbacks associated with the tools used by the private equity.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2016
Number of pages110