Value Creation in Private Equity Funds: In Theory and Practice

Nicolaj Lund Svane

Student thesis: Master thesis


In recent time, private equity funds have got more and more attention. Controversial takeovers, like the TDC buyout, have led to hard criticism. Private equity funds are usually closed about the details in their investments, what they pay, what they earn and how they create value. This leads to many myths and prejudices. The value creation is the fundamental function in private equity funds’ investments. Through operational improvements, consolidation, improvement of price multiple, financial gearing and active ownership, the private equity funds try to raise the value of their portfolio companies, earn an exit price higher than the entry price and pay their investors a satisfying return. The results show that their methods in practice are broadly equal to the theory and that the operational improvements are the most used strategy. E.g. reduce costs, raise EBITDA and streamline the operational procedures. It is the improvement of multiple which creates most value in practice. However, the result is only based on two case studies. In theory, the strategy which creates most value is buy-and-build. By using this method, the private equity fund creates a larger company and improves price multiple, as it raises its revenue and EBITDA. The five different strategies do not exclude each other. Actually it is normal that the private equity funds more or less use all strategies. They takeover a target in a leveraged buyout, agree that the former owner keep a stake, place their own partners - or people from the network - in the board or management, they then improve the daily operation, acquire other companies and try to improve price multiple. The discussion recognizes that all companies no matter if they are privately or public owned, have the same opportunities to use the five strategies mentioned above to create value. The only difference is self-financing. All company can use leverage finance, but only the private equity funds’ portfolio companies may use self-financing through a debt-push-down. It is a controversial strategy which is subject to a lot of criticism. In general, the criticism is hard and baldly. Facts disprove some of the critic points. It seems that the criticism is strongly affected by the political conviction of the person, who makes the criticism. However, some of the criticism is deserved, because of some poor examples with e.g. tax fraud or bankruptcy, while the private equity fund earns a high return. Fortunately, most private equity funds are playing by rules and are beneficial for the society by turnarounds and the job creation leading to more taxes paid.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2017
Number of pages80