Cuprins
- Abstract 3
- 1. Introduction 3
- 2. Literature 5
- 3. Empirical Analysis 7
- 3.1 Value creation drivers 7
- 3.2 Private equity investments and industry performance 11
- 3.3 Cyclicality and timing 12
- 3.4 The impact of PE on the economic growth of countries 16
- Discussion of the Results and Conclusions 24
- References 26
Extras din proiect
Abstract
The purpose of this paper is to analyze and assess the ability of private equity (PE) investments to create value. Using different samples of private equity transactions that took place in OECD countries, the paper investigates the drivers of value creation, the effect of private equity on industry performance, the existence and the consequences of cyclicality in private equity, and the implications for the economies of countries. From the analysis emerges that PE-backed firms outperform their sector peers, and that two-third of value creation can be attributed to operational and market effects against one-third due to leverage effect; PE are able to reduce agency costs and positively affect the performance of industries and economies as a whole. In addition, there is evidence of cyclicality in PE industry, which performs better in bad periods. Strong relation of booms and busts of private and public equity market.
Keywords: private equity, value creation, cyclicality
1. Introduction
After the first wave of leveraged buyouts (LBO) in 1980s and the consequent bust of the LBO industry of the late 1980s and early 1990s, many researchers started to study this phenomenon. In the following years, however, there was a revival of LBO activity, which reached new levels never seen before, just to collapse again. Although many people began to wonder if and how this industry was actually creating value, few answers could be given, as this industry has always been very opaque and there is not much available data. Nonetheless, this topic is very important and more relevant than ever, given the current economic situation and the need for proper regulation, and already several academics and practitioners tried to answer the question of how value is created in private equity transactions.
The literature on this topic did not provide an analysis that distinguishes between operational and financial value drivers. For the sake of a better understanding on this topic, it is necessary to discern the entity of each driver in creating value. We will see that the driver that accounts for the biggest part in creating value is the leverage effect, because the resulting higher levels of debt after a LBO generate substantial tax shields. In section 2, dedicated to the literature, and section 3.1, dedicated to value creation drivers, it is argued that there is not a unanimously accepted result on the influence of private equity on firms’ performance. This section will also show that there is an increase in the number of patent citations in the firms after the buyout, although there is not much evidence of a positive relation between PE investments and an increase in innovation. It will provide evidence that that deal partners skills are very important for determining the outcome of deals, hence to create value.
In section 3.2 it will be addressed the issue of contagion effect, raised for the first time by Jensen (1989). The hypothesis that higher competitive pressure, as well as a threat of takeover, push the firms to innovate and increase their efficiency, seems corroborated by data. Section 3.2 will deal also with another popular belief, that PE investments lead to a reduction in the number of employees as a means of cost reduction, and tries to dismiss the concern of reverse causality.
Another big issue of private equity, which strongly emerged in the venture capital boom and bust of late 1990s and 2000s and the buyout boom and bust of mid and late 2000s, was that of cyclicality.
From these episodes there appears to be a co-movement of public and private capital market. As we will see in the literature section, some researchers argued that easy financing (cheap debt) lowers private equity performance. Section 3.2 argues that there is no incontrovertible evidence of this counter-cyclicality of fundraising. However, it seems that booms and busts of private equity are linked to public equity market.
Section 3.4 examines the impact of PE on the economic performance of countries, by analyzing the difference in the growth rate of some important variables between a sample of firms that received PE investments and another that did not.
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