Specialization in Nordic Private Equity: An Empirical Study on Post-Buyout Performance of Nordic Private Equity Backed Buyouts

Abstract

Private equity (PE) has by some been hailed as a superior organizational form that fosters corporate economic efficiency due to its unparalleled governance framework. Still further, the evolution of PE markets has resulted in increased sophistication and specialization of PE firms. Though the empirical evidence related to these research areas of PE has amassed over the years, evidence on the Nordic PE market remains scarce. Hence, this thesis examines whether PE-backed buyouts exhibit higher post-buyout operating performance than comparable companies, and whether relative specialization of PE firms by industry or stage produces a competitive advantage. We construct and study a sample of 120 Nordic buyouts, and a matched peer group, over the period 2002-2016. Nordic PE firms are classified as specialists and generalists by computing an index of competitive advantage (ICA) based on the portfolio composition of sample PE firms. We evaluate post-buyout operating performance by studying differences in means in the three years following the acquisition (t+1 to t+3). Differences in post-buyout performance are analyzed using bivariate analysis. Additionally, we investigate a set of value adding and return drivers by running a series of OLS regressions, in order to explore their impact on post-buyout performance and value creation in portfolio companies. The main findings of this study suggest that; I) PE-backed buyouts exhibit greater post-buyout performance with respect to Turnover growth and EBIT/Assets, confirming “Jensen’s Hypothesis” of PE as a superior organizational form, and II) greater relative specialization by industry or stage does not lead to higher post-buyout performance as suggested by the “advantageto-specialization” hypothesis. Finally, initial conditions of the target company, namely initial profitability and turnover, are important predictors of post-buyout performance. Our findings suggest that prudent and strong investment selection skills may be of higher importance than that of PE firm specialization in raising performance.