Does the Plan Trump the Team? CEO Turnover, Selection and Assessment in Private Equity Buyouts: Evidence from Finland

Abstract

The purpose of this study is to look at the role of top management in Finnish private equity (PE) buyouts. This is done by analyzing the CEO turnover, selection, replacement deci-sion and management assessment using a novel quantitative and qualitative approach. The study is thus both theory-testing and theory-building.

The sample consists of unique hand-picked data of 114 Finnish buyout deals conducted be-tween 2006 and 2016 excluding divisional sales and companies formed through buy & build. Of these 92 had sufficient fundamentals in Bureau van Dijk’s Orbis –database for statistical analysis. In addition, entire Finnish buyout landscape, 12 buyout-focused PE firms, were in-terviewed together with a consultancy company Mercuri Urval to gather qualitative insight on management approach.

Using (non-)parametric tests and logit-model this study finds that CEO is replaced in 32% of buyouts – less than in comparable studies. The likelihood is increased when an experienced, larger, buyout firm is buying a larger portfolio company and credit is readily available. The theory-testing findings are robust for probit-model, selection bias and multicollinearity.

By conducting multiple case study from the interviews it seems that Finnish PE firms can be roughly split into two categories: those with high-managerial focus tend to be smaller or lower end of medium-sized buyout funds (e.g. AUM €350m, 8.4 investment professionals & ~7 in-vestments in portfolio) targeting smaller entrepreneur-lead companies. Here the buy process-es are often less structured ensuring better access to the management early on to the deal allowing the use of workshop-assessment. For them, a poor existing management is often a deal-breaker and a replacement has been agreed beforehand. These funds are majority in Finland partly explaining lower CEO change %.

Low-managerial focus PE firms tend to be larger (e.g. AUM €690m, 15 investment profes-sionals & 13 investments in portfolio) targeting larger companies with tendency to base a high portion of their strategy on buy & build. They primarily source their deals from an intermedi-ary such as an investment bank highly limiting their access to the management making them prone to CEO window-dressing behavior. These facts could explain the relatively higher likeli-hood of larger PE firms replacing the CEO of larger companies as management is less in-volved and assessed early on the buy process. These larger buyout funds tend to also use some sort of management review more often.

The theory-building findings are robust for conjoint analysis performed on decision-making suggesting management has central role in all PE as supported by the relatively low CEO turnover %.