The Business Model of Private Equity Funds and Its Drivers of Value Creation: An Empirical Case Study of Joe & the Juice

Alexandra Rosenberg Jørgensen & Milena Emilia Hakanpää

Student thesis: Master thesis


The private equity industry has grown significantly since its emergence and continues to attract increasing capital from investors year after year. However, despite a considerable amount of research conducted on private equity, there still exists little understanding of the private equity business model regarding how private equity funds generate returns for the investors. In particular, investors have limited insight as to how value is actually created on the portfolio company level rather than at the private equity fund level. Nonetheless, it is this value creation process that eventually translates into returns. Hereby, the purpose of this thesis is to answer the following problem statement: What is the business model of private equity funds and how does it drive value creation for its investors, both in theory and in practice? To shed light upon the first aspect of the problem statement, a theoretical framework has researched the business model of private equity funds and identified three key drivers of value creation, namely, financial leverage, multiple expansion, and operational improvements. The research finds that while financial leverage and multiple expansion still contribute to the returns generated by private equity funds, operational improvements now represent as much as 50% of total returns. This value driver has shown to exceed the conventional emphasis on driving revenue growth and margin improvements in the portfolio companies to also involve improvements within human capital and strategy. Thus, it appears private equity funds take an active role in the value creation on the portfolio company level. To research this in practice, the thesis has conducted an empirical case study of Swedish private equity fund Valedo and its investment in Joe & the Juice. Since the investment, Joe & the Juice has grown from a Danish company with 52 stores in 2013, to a multinational company with 210 stores in 15 countries worldwide in 2017. Through a holistic analysis of the Joe & the Juice, the thesis has examined how Valedo has employed the identified key value drivers to enhance value creation. The analysis indicates that Valedo has mainly implemented operational improvements with emphasis on driving revenue growth. To quantify the potential value creation, an LBO model has been built based on forecasting and underlying assumptions. The model estimates a gross IRR of 36% for Valedo and its investors if the investment is exited in 2020 with an exit multiple of 8x. Hereof, considering the consensus that private equity investments should yield a gross IRR of 25%, the findings suggest that Valedo has successfully created value on the portfolio company level and hereof for its investors.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2019
Number of pages159